In Re: Bernard L. Madoff Investment Securities LLC

Background

This appeal arose from a clawback action in the liquidation proceedings of Bernard L. Madoff Investment Securities LLC (BLMIS). The Trustee sought to avoid approximately $1.2 million that Fairfield Pagma Associates, LP withdrew from BLMIS in fictitious profits connected to Bernard Madoff’s Ponzi scheme. The parties did not dispute that the Trustee could avoid the transfers under Section 550(a) of the Bankruptcy Code or that Fairfield Pagma’s general partners could be liable for its debts to the BLMIS estate.

The disputed issue was whether Seymour and Marjorie Kleinman remained general partners of Fairfield Pagma during the relevant period. Seyfair, LLC and Fairfox, LLC became general partners in 2005. Defendants maintained that Seymour and Marjorie had transferred their partnership interests to those entities and were no longer general partners from December 11, 2006, through December 11, 2008.

The Trustee produced a partnership account agreement identifying Seymour and Marjorie as general partners with unlimited liability and stating that the representations in the agreement would remain effective until BLMIS received written notice of a change. Defendants did not produce documents in response to the Trustee’s discovery requests. After discovery closed, Defendants submitted declarations and exhibits, including operating agreements and Fairfield Pagma tax records, that had not previously been produced.

The Bankruptcy Court admitted declarations from Ronni Leo and B. Kansler but excluded Adam Kansler’s declaration and related exhibits under Federal Rule of Civil Procedure 37(c)(1). It then granted summary judgment to the Trustee. The Bankruptcy Court concluded that Defendants’ evidence did not create a genuine factual dispute about whether Seymour and Marjorie remained general partners.

Issues on Appeal

The appellants argued that the Bankruptcy Court improperly excluded Adam Kansler’s declaration, incorrectly found no factual dispute about Seymour and Marjorie’s partnership status, and improperly awarded prejudgment interest. The district court did not address the prejudgment-interest issue because it found an error of law requiring the summary-judgment decision to be vacated.

Court’s Analysis

The district court explained that summary judgment is proper only when there is no genuine dispute about a material fact and the moving party is entitled to judgment as a matter of law. It reviewed the Bankruptcy Court’s summary-judgment ruling independently and reviewed the evidentiary exclusion for abuse of discretion.

The Bankruptcy Court had reasoned that only written notice to the other partners could establish an effective withdrawal as a general partner. The district court held that this premise was legally incorrect. Although New York law allows a general partner to withdraw by giving written notice, other provisions provide that, absent contrary contractual language, a partner ceases to be a partner upon assigning the entire partnership interest. New York law does not require special wording or a particular form for an assignment if the intent to make a present transfer is apparent.

Because of that legal error, the Bankruptcy Court did not adequately consider whether the operating agreements attached to Adam Kansler’s declaration could show an assignment of the partnership interests. It also did not adequately consider whether the Form K-1 tax records, which appeared to show Seymour and Marjorie withdrawing their capital contributions while Seyfair and Fairfox made corresponding contributions, created a material factual dispute.

The district court acknowledged that the documents’ admissibility and evidentiary value were questionable, especially because they were produced late and some operating agreements were undated, unsigned, and incomplete. But it held that the Bankruptcy Court should make those determinations in the first instance after applying the correct New York law. The district court therefore did not decide whether the documents should be admitted or whether they established that Seymour and Marjorie had ceased being general partners.

Disposition

The court vacated the Bankruptcy Court’s judgment granting summary judgment to the Trustee and remanded the case for further proceedings consistent with the opinion and order. Judge Valerie Caproni also stated that the court did not need to address the appellants’ separate issue concerning substitution for Seymour because that issue was not properly raised on appeal.