In Re: Bernard L. Madoff Investment Securities LLC

Background

The dispute arose from the liquidation of Bernard L. Madoff Investment Securities LLC under the Securities Investor Protection Act, a federal statute governing the liquidation of certain failed brokerage firms. Irving H. Picard, the appointed Trustee, sued Tensyr Limited to recover approximately $35 million that he alleged Tensyr received as later transfers of customer property through Fairfield Sentry Limited, a Madoff feeder fund.

Tensyr moved to dismiss in the Bankruptcy Court under Federal Rule of Civil Procedure 12(b)(2), arguing that the court lacked personal jurisdiction over Tensyr, and under Rule 12(b)(6), arguing that the Trustee had not adequately pleaded a claim for recovery of customer property. On November 3, 2023, the Bankruptcy Court denied Tensyr’s motions in their entirety.

The Bankruptcy Court found that the Trustee had adequately alleged a preliminary showing of personal jurisdiction. The allegations included that Tensyr invested in Fairfield Sentry while knowing and intending that its investments would be with New York-based Madoff Securities, and that the funds would be used to purchase securities in the United States through Madoff Securities. The Bankruptcy Court also found that the Trustee had plausibly alleged that Tensyr received Madoff customer property, while leaving detailed tracing and calculation issues for a later stage.

Request for Interlocutory Appeal

Tensyr asked the district court for permission to immediately appeal the Bankruptcy Court’s nonfinal order. Under the standard applied by courts in this circuit, permission for such an appeal generally requires three things: a controlling legal question, substantial grounds for disagreement about that question, and a likelihood that an immediate appeal would materially advance the end of the litigation. Even when those requirements are met, courts grant permission only in exceptional circumstances because they generally avoid piecemeal appeals before a final judgment.

Tensyr proposed two questions concerning personal jurisdiction. First, it challenged whether the Trustee could make the required preliminary showing when Tensyr claimed that the funds it received came from a foreign intermediary rather than directly from the United States debtor. Second, it challenged whether the Bankruptcy Court could rely on the Trustee’s jurisdictional allegations after Tensyr submitted evidence that it said disproved them.

Court’s Analysis

Judge Engelmayer held that neither proposed question was a controlling question of law suitable for immediate appeal. The first question depended on Tensyr’s factual assertion that it was impossible for its funds to have originated with Madoff Securities, but the Bankruptcy Court had not made that finding. Instead, the Bankruptcy Court had determined only that the Trustee’s allegations made receipt of Madoff customer property plausible at the pleading stage. The district court also noted that the Bankruptcy Court’s personal-jurisdiction ruling relied on Tensyr’s alleged knowledge and intent concerning investments directed through Fairfield Sentry, not on a final determination that Tensyr had received Madoff customer property.

The second proposed question also depended on a factual review of Tensyr’s submissions and the alleged transfers. Answering it would require examining the record and deciding whether Tensyr’s evidence conclusively showed that it had not received Madoff customer funds. Judge Engelmayer stated that such a record- and fact-dependent inquiry was not a pure legal question that could be decided quickly and cleanly.

The court also rejected Tensyr’s argument that a prior related proceeding required immediate review. Judge Engelmayer explained that the earlier proceeding involved a different issue—subject-matter jurisdiction under the Foreign Sovereign Immunities Act—and that Tensyr was not a foreign sovereign. The earlier ruling therefore did not conflict with the Bankruptcy Court’s ruling on personal jurisdiction, which concerned whether the Trustee had adequately pleaded a preliminary jurisdictional case consistent with due process.

The court further held that Tensyr had not shown substantial grounds for disagreement. The proposed questions were not unresolved issues of exceptional difficulty or first impression; instead, they arose from Tensyr’s disagreement with how the Bankruptcy Court applied the law to the facts and pleadings before it. An immediate appeal also would not materially advance the litigation because the proposed questions were removed from the Bankruptcy Court’s actual reasoning and would be unlikely to change the course of the case. The district court noted that an appeal was more likely to delay the proceedings.

Disposition

Judge Engelmayer denied Tensyr’s motion for leave to appeal in its entirety. He also concluded that no exceptional circumstances justified interrupting the bankruptcy proceedings, particularly because the Bankruptcy Court had made only a preliminary finding regarding personal jurisdiction and could reach a different conclusion after further proceedings and a fuller record. The Clerk was directed to terminate the outstanding motions and close the district court case.