In Re: Bernard L. Madoff Investment Securities LLC

Background

The appeal arose from the liquidation of Bernard L. Madoff Investment Securities LLC (BLMIS) under the Securities Investor Protection Act. Seymour Epstein and Shelburne Shirt Company, Inc. had been investment-advisory customers of Madoff and BLMIS. During the two years before the liquidation, Epstein withdrew $1,110,538.16 more than had been deposited into his account, and Shelburne withdrew $1,511,900.39 more than had been deposited into its account.

Irving H. Picard, the trustee for the BLMIS liquidation, sued to avoid and recover those transfers as fictitious profits. The Bankruptcy Court granted the Trustee’s motion for summary judgment, denied the appellants’ cross-motion to dismiss for lack of subject-matter jurisdiction, and entered judgment totaling $2,622,438.55, plus prejudgment interest. The appellants appealed, arguing that the Bankruptcy Court lacked authority to enter a final judgment and that genuine factual disputes existed about whether BLMIS or Madoff owned the bank accounts from which the transfers were made.

Bankruptcy Court’s Authority

Judge McMahon agreed that the Bankruptcy Court could not enter a nonconsensual final judgment on the fraudulent-transfer claims. Because the appellants had not consented to final judgment by the Bankruptcy Court, Judge McMahon treated that court’s decision as a report and recommendation to the District Court rather than as a final judgment. The absence of a withdrawal of the bankruptcy reference did not change that constitutional limitation.

The District Court did not adopt the Bankruptcy Court’s reasoning concerning the law-of-the-case doctrine. Judge McMahon explained that the doctrine generally governs legal conclusions, not factual findings from separate proceedings involving different parties. The factual findings in earlier BLMIS cases therefore did not automatically bind the appellants here.

Standing and Summary Judgment

Judge McMahon nevertheless conducted a de novo review, meaning an independent review without deference to the Bankruptcy Court’s conclusions. The court held that Picard had Article III standing because he was suing as fiduciary for an insolvent estate to recover customer property for that estate’s benefit. The appellants’ argument that Madoff, rather than BLMIS, made the transfers concerned the merits of the Trustee’s claims, not the Trustee’s standing or the court’s jurisdiction.

The court applied the summary-judgment standard, under which judgment is proper when no genuine dispute over a material fact requires a trial and the moving party is entitled to judgment under the law. It held that the Trustee established all three elements of a fraudulent-transfer claim under 11 U.S.C. § 548(a)(1)(A):

Ownership of the Transferred Funds

The court found no genuine factual dispute that the JPMorgan accounts had become BLMIS accounts when Madoff converted his sole proprietorship to the BLMIS limited liability company in 2001. Madoff’s amended filing with the Securities and Exchange Commission stated that all assets and liabilities related to the prior business would be transferred to BLMIS. The post-2001 bank statements also identified BLMIS and its business address, even though some account records and checks continued to use Madoff’s name.

The Trustee’s expert evidence showed that the investment-advisory business was part of BLMIS and that customer money was pooled in BLMIS bank accounts. The appellants offered no contrary expert testimony or other evidence sufficient to create a genuine factual dispute. The court therefore held that the transfers were of BLMIS customer property, not Madoff’s personal property.

The court also found that the Treasury-bill positions listed on the appellants’ customer statements were fictitious. The Trustee’s expert compared the listed securities with actual Treasury-bill records and found no matching transactions. The court concluded that the investment-advisory business did not legitimately trade securities for these customers and that the customer statements did not establish otherwise.

Fraudulent Intent and Other Defenses

The court applied the Ponzi-scheme presumption, which permits fraudulent intent to be established when transfers were made in furtherance of a proven Ponzi scheme. The court found that the uncontroverted evidence established that BLMIS operated such a scheme and that the appellants presented no evidence rebutting the presumption. The Trustee therefore proved fraudulent intent as a matter of law.

The court rejected the appellants’ request for a credit for taxes paid on the fictitious profits. It reasoned that allowing such a credit would create difficult tracing and proof problems, could lead to claims for other expenses, and would reduce recoveries available to other victims. The court also held that the Trustee could rely on BLMIS’s books and records to prove the profit withdrawals and rejected the challenge to the admissibility of the Trustee’s expert reports and related criminal-case testimony.

Prejudgment Interest and Entity-Specific Rulings

Judge McMahon awarded four-percent, noncompounding prejudgment interest from November 30, 2010, the date the action was filed, through the date of judgment. The court found the award justified by the Trustee’s loss of use of the transferred funds and the time and expense required to litigate the appellants’ arguments.

The court held that Shelburne could be sued even though it had been dissolved on December 28, 2009, because the Trustee filed the action less than one year later and the claim concerned an obligation arising before dissolution. The court therefore entered judgment against Shelburne for $1,511,900.39 plus prejudgment interest.

The court entered judgment for $1,110,538.16 against the Estate of Seymour Epstein and Muriel Epstein as executrix of the estate and trustee of the trusts created by Seymour Epstein’s will. However, because Herbert C. Kantor died while the case was pending and the Trustee had not moved to substitute a successor or representative, the court vacated the judgment against Jane Epstein, Randy Austin, and Susan Gross as successor co-trustees.

Disposition

The court granted the Trustee’s summary-judgment motion. It directed the Clerk to enter the Epstein Judgment and the Shelburne Judgment, each plus four-percent prejudgment interest through the date of the order, while vacating the judgment against the successor trustees. No separate disposition beyond the court’s merits ruling is stated in the conclusion for the appellants’ cross-motion to dismiss, although the court rejected their standing and jurisdiction arguments.