Ponzi Scheme Clawback Litigation Strategies for Bringing or - - PowerPoint PPT Presentation

Ponzi Scheme Clawback Litigation

Strategies for Bringing or Defending Trustee Clawback Claims

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Presenting a live 90-minute webinar with interactive Q&A

Corey R. Weber, Part ner, Ezra Brutzkus Gubner, Woodland Hills, Calif. Ant hony L. Paccione, Part ner, Katten Muchin Rosenman, New Y

• rk

Jesse S . Finlayson, Part ner, Finlayson Williams Toffer Roosevelt & Lilly, Irvine, Calif.

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Fraudulent Transfers: Ponzi Scheme Clawback Litigation in Bankruptcy Strategies for Bringing or Defending Trustee Clawback Claims

Sponsored by the Legal Webinar Group of Strafford Publications Anthony L. Paccione, Chair NY Litigation Department, Katten Muchin Rosenman LLP Corey Weber, Partner, Ezra Brutzkus Gubner LLP

Jesse S. Finlayson, Partner, Finlayson Williams Toffer Roosevelt & Lilly LLP

5

Introduction

“When the financial tide goes

• ut is when you will see who

is swimming naked”

6

Threshold Questions

 What is a “Ponzi Scheme?  When does it begin?  SIPC Protected?  Type of Receiver to Be Appointed

7

Today’s Topics

 Clawbacks – From the Trustee’s

perspective and the Prima Facie case based on Fraudulent Conveyance

 Clawbacks from a Transferee’s

Perspective

 “Mere Conduit,” Section 546(e) and

Other Specific Clawback Defenses

8

TRUSTEE’S CLAWBACK CLAIMS

• Preference Claims

– Section 547 claims

• Fraudulent Transfer Claims

– Claims Under the Bankruptcy Code

• Section 548 and 550 claims

– Claims Under State Statutes

• Section 544 and UFTA state law claims

9

PREFERENCE CLAIMS

10

Preference Claims

• Transfers in Ponzi schemes are more vulnerable to

attack as fraudulent transfers – In re Grafton Partners, L.P., 321 B.R. 527, 532 FN 5 (9th Cir. BAP 2005)

• However, transfers in Ponzi cases can still be recovered

as preferences – See In re United Energy Corp, 102 B.R. 757 (9th Cir. BAP 1989); Danning v. Bozek (In re Bullion Reserve

• f North America), 862 F.12 1214 (9th Cir. 1988)

11

Defenses to Preference Claims

• Same defenses as to a normal preference claim
• But, no ordinary course defense

– Henderson v. Buchanan, 985 F.2d 1021, 1025 (9th Cir. 1993) – In re Bullion Reserve Co. of North America, 836 F.2d 1214, 1219 (9th Cir. 1988)

12

FRAUDULENT TRANSFER CLAIMS

13

Actual Intent Claims Under the Bankruptcy Code

• “The trustee may avoid any transfer (including any transfer to
• r for the benefit of an insider under an employment contract)
• f an interest of the debtor in property, or any obligation

(including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—(A) made such transfer or incurred such

• bligation with actual intent to hinder, delay, or defraud any

entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted…” – 11 U.S.C. Section 548(a)(1).

14

Actual Intent Claims Under State Statutes (California)

• “A Transfer made or obligation incurred by a debtor is

fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the

• bligation was incurred, if the debtor made the transfer
• r incurred the obligation as follows: (1) With actual

intent to hinder, delay, or defraud any creditor of the debtor.” – California Civil Code Section 3439.04(a).

15

Actual Intent Claims with a Guilty Plea

• Guilty plea in criminal case for the Ponzi scheme

principal can conclusively establish actual intent

• “[w]e now hold that a debtor’s admission, through guilty

pleas and a plea agreement admissible under the Federal Rules of Evidence, that he operated a Ponzi scheme with the actual intent to defraud his creditors conclusively establishes the debtor’s fraudulent intent under 11 U.S.C. section 548(a)(1)(A) and California Civil Code section 3439.04(a)(1), and precludes relitigation of that issue…” Johnson v. Neilson (In re Slatkin), 525 F.3d 805, 814 (9th Cir. 2008)

16

Actual Intent Claims with No Guilty Plea

• Establish a Ponzi Scheme (the Ponzi

Scheme Presumption)

– If the Bankruptcy Court concludes that the Debtor operated as a Ponzi scheme, actual intent to hinder, delay or defraud creditors will be established

• Donell v. Kowell, 533 F.3d 762, 770 (9th Cir. 2008)
• Barclay v. Mackenzie (In re AFI Holding, Inc.), 525

F.3d 700, 704 (9th Cir. 2008)

17

Constructive Fraud Claims Under the Bankruptcy Code

• “…(B)(i) received less than a reasonably equivalent value in

exchange for such transfer or obligation; and (ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or

• bligation; (II) was engaged in a business or transaction, or was

about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; (III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured;

• r (IV) made such transfer to or for the benefit of an insider, or

incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.” – 11 U.S.C Section 548(a)(1)(B).

18

Constructive Fraud Claims Under State Law (California)

• “A Transfer made or obligation incurred by a debtor is fraudulent as

to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows:… (2) without receiving a reasonably equivalent value in exchange for the transfer

• r obligation, and the debtor either: (A) Was engaged or was about

to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction. (B) Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.” – California Civil Code Section 3439.04(a). See also alternate test under Section 3439.05.

19

Constructive Fraud vs. Actual Intent Claims

• Constructive fraudulent transfer claims should have the same
• utcome as actual intent claims, but the burden of proof

differs

– Donell v. Kowell, 533 F.3d 762, 771 (9th Cir. 2008)

• In addition to differences re burden of proof, constructive

fraud claims will likely require an expert witness (e.g., forensic accountant)

• If there is no plea agreement, the insolvency tests in

constructive fraud claims provide an alternate way to avoid and recover transfers

20

Fraudulent Transfer Claims Under State vs. Federal Law

• 2 year pre-bankruptcy petition reach-back under Section

548

• There is normally a longer reach-back under state law

– In California, the reach back period is up to 7 years (Cal. Civil Code Section 3439, et seq.)

• Statute of limitations

– Trustee has 2 years to file a complaint post- bankruptcy

21

Fictitious Profits

• General rule is that the Trustee’s recovery

is limited to recovery of fictitious profits from net winners

• Withdrawals - Investments = Fictitious

Profits in most circuits

– Donell v. Kowell, 533 F.3d 762, 770 (9th Cir. 2008)

22

Fictitious Profits in the Madoff Case

• “Equality is achieved in this case by employing the

Trustee's method, which looks solely to deposits and withdrawals that in reality occurred. To the extent possible, principal will rightly be returned to Net Losers rather than unjustly rewarded to Net Winners under the guise of profits. In this way, the Net Investment Method brings the greatest number of investors closest to their positions prior to Madoff's scheme in an effort to make them whole.” In re Bernard L. Madoff Inv. Sec. LLC, 424 B.R. 122, 142 (Bankr. S.D.N.Y. 2010)

23

Potential for the Trustee to Recover More than Fictitious Profits

• The Trustee can recover the total transfers from

the Debtor to the defendant (fictitious profits + return of principal) if: – The Trustee establishes his prima facie case; and – The defendant does not establish his defenses

24

Recovering Fraudulent Transfers Made to Charities

• Limitation on avoiding transfers to charities

– “A transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not be considered to be a transfer covered under paragraph (1)(B) in any case in which— (A) the amount of that contribution does not exceed 15 percent

• f the gross annual income of the debtor for the year in which the

transfer of the contribution is made; or (B) the contribution made by a debtor exceeded the percentage amount of gross annual income specified in subparagraph (A), if the transfer was consistent with the practices of the debtor in making charitable contributions.”

• 11 U.S.C. Section 548(a)(2)
• Limitation only applies to constructive fraudulent transfers, not as to

fraudulent transfers made with actual intent

25

Stern v. Marshall Issues

• Are fraudulent transfer claims “core claims,” but

“unconstitutionally core”?

• Following Stern, can bankruptcy courts enter final

judgments on fraudulent transfer claims?

• Following Stern, can bankruptcy courts enter default

judgments on fraudulent transfer claims?

26

Jesse S. Finlayson Finlayson Williams Toffer Roosevelt & Lilly LLP 15615 Alton Parkway, Suite 250 Irvine, CA 92618 Phone 949-759-3810 x23 / Fax 949-759-3812 jfinlayson@fwtrl.com

Materials prepared by Mark Kaufman McKenna Long LLP For use in June 2011 Strafford program on this topic And used herein with his permission

A. Defenses to the Prima Facie Case

Once the Trustee or DIP has established a prima facie case for a fraudulent conveyance by satisfying the criteria to demonstrate either actual or constructive fraud committed by the Transferor, the transferee may be able to defeat its liability as a recipient of a fraudulent conveyance by raising one or more defenses.

28 Finlayson Williams Toffer Roosevelt & Lilly LLP

B. Statutory Framework

• 1. 11 U.S.C. § 548(c) provides a defense to the “initial”

transferee if it both received the transfer from the fraudulent transferor in good faith and for value. In re Bayou Group, LLC, 439 B.R. 284, 308 (S.D.N.Y. 2010) (“Bayou IV”).

• 2. State law essentially provides these same defenses to

fraudulent conveyance claims pursued under 11 U.S.C. § 544.

• 3. The burden of proof in respect to the transferee’s

defenses under § 548 and correlative state law is on the defendant transferee. In re Bennett Funding Corp., Inc., 232 B.R. 565, 573 (Bankr. S.D.N.Y. 1999).

29 Finlayson Williams Toffer Roosevelt & Lilly LLP

B. Statutory Framework (cont.)

• 4. 11 U.S.C. § 550(b) provides further insulation

against liability for a fraudulent conveyance to an “immediate” or “mediate” transferee of the initial transferee if that subsequent transferee can establish that it received the transfer:

• In good faith;
• For value; and
• “without knowledge of the voidability of the

transfer avoided.”

30 Finlayson Williams Toffer Roosevelt & Lilly LLP

B. Statutory Framework (cont.)

• 5. Observations about 550(b) defenses:

(a) the focus of “good faith” and “for value” defenses for an immediate or mediate transferee relate to the transfer between the initial transferee and the defendant subsequent transferee. (b) the “without knowledge of the voidability” element, however, is directed to whether the immediate or mediate transferee defendant knew about the voidability of the initial transfer — i.e. does the second transferee have awareness that the initial transfer was either not in good faith or not for value or was lacking in both respects.

31 Finlayson Williams Toffer Roosevelt & Lilly LLP

C. Good Faith

• 1. Not Likely To Be Decided On Summary Judgment:

Defending one’s good faith, of course, is specific to each avoidance action, so a trustee bringing claims to avoid transfers must be prepared to address the unique facts of what each recipient of a fraudulent conveyance knew or of which it was on inquiry

• notice. Because these are fact specific issues and

involve the state of knowledge or awareness of the specific recipient, it will be a rare case where summary judgment to either party on this element

• f the defense is likely or appropriate.

32 Finlayson Williams Toffer Roosevelt & Lilly LLP

C. Good Faith (cont.)

• 2. Objective Good Faith; Against Whom Inquiry Notice is to

be Measured: Where the awareness of facts that would, if established, prove lack of good faith are in dispute, as is true in the vast majority of cases, courts have grappled with whether the defendant’s good faith should be decided

• n a subjective test where the court attempts to adduce

the actual mindset of the particular transferee who receives the transfer, or on an objective test where the court or jury decides whether a typical investor with the same acumen and sophistication of the actual defendant would have been put on inquiry notice that the transaction lacks good faith. Most courts have employed the objective test. In re Agric. Research &

• Tech. Corp., 916 F.2d 528, 535-36 (9th Cir. 1990).

33 Finlayson Williams Toffer Roosevelt & Lilly LLP

C. Good Faith (cont.)

• 3. Frequently, courts place a “specific focus on the

class or category of the transferee” and therefore whether a transferee is on inquiry notice is informed by “the standards, norms, practices, sophistication and experience generally possessed by participants in the transferee’s industry or class.” Bayou IV, 439 B.R. at 313.

• 4. What a person with defendant’s experience and

sophistication should have been on inquiry notice to ascertain is itself almost always a fact issue for the trier of fact. Bayou IV, 439 B.R. at 320-327.

34 Finlayson Williams Toffer Roosevelt & Lilly LLP

C. Good Faith (cont.)

• 5. The defendant may still be able to successfully defend

its good faith, even if it was under a duty of inquiry, if it can show that, as most courts formulate the test, it would not have been able to ascertain relevant facts about the debtor even if it had made reasonably diligent inquiry. In re Agric. Research & Tech. Grp., 916 F.2d at 536. This, too, is a factual issue to be decided case by case. Other courts have imposed a higher standard and require the defendant to have actually made diligent inquiry where it is found to be

• n inquiry notice. See e.g. In re Manhattan Inv. Fund

III, 397 B.R. 1, 22-24 (S.D.N.Y. 2007).

35 Finlayson Williams Toffer Roosevelt & Lilly LLP

C. Good Faith (cont.)

• 6. Lack of Good Faith Is Premised On Knowledge or

Inquiry Notice of Debtor’s Fraud or Insolvency: There are two types of information, if possessed by the defendant, that courts have held to manifest lack

• f good faith: knowledge of a fraud or knowledge of

the debtor’s insolvency. Bayou IV rejects the notion that inquiry notice awareness of other issues regarding the transferor’s operations that do not meaningfully bear on the debtor’s insolvency or its fraudulent practices do not give rise to a basis to challenge the defendant’s good faith.

36 Finlayson Williams Toffer Roosevelt & Lilly LLP

C. Good Faith (cont.)

• 7. Frequently present in Ponzi cases is the situation

where the trustee argues that the transferee is put

• n notice of the likely fraudulent nature of the

debtor because the purported returns to the transferee are substantially beyond typical market returns for similar investments. But arguing lack

• f good faith based on this proposition has its

limits.

37 Finlayson Williams Toffer Roosevelt & Lilly LLP

C. Good Faith (cont.)

• 8. Red Flags

In determining whether the transferee should be on inquiry notice of a debtor’s fraudulent activities or insolvency, potential “red flags” identified by courts have included:

• a. statements by the debtor concerning its

improprieties and fraudulent conduct, see Armstrong v. Collins, No. 01 Civ. 2437 (PAC), 02

• Civ. 2796 (PAC), 02 Civ. 3620 (PAC), 2010 WL

1141158, at *27-28 (S.D.N.Y. Mar. 24, 2010)

38 Finlayson Williams Toffer Roosevelt & Lilly LLP

C. Good Faith (cont.)

• b. actual knowledge of the debtor’s financial problems, see

In re Grove-Merritt, 406 B.R. 778, 810 (Bankr. S.D. Ohio 2009)

• c. knowledge of a tax lien filed against the debtor, see In re

Armstrong, 259 B.R. 338, 344 (Bankr. E.D. Ark. 2001)

• d. knowledge of an impending bankruptcy, see In re

McLaren, 236 B.R. 882, 902 (Bankr. D.N.D. 1999)

• e. knowledge of the debtor’s commingling of funds,

acceptance of escrow checks in its personal account, and previous bounced checks, see Cannon v. J.C. Bradford & Co., 230 B.R. 546, 593-94 (Bankr. W.D. Tenn. 1999) (reversed on appeal)

39 Finlayson Williams Toffer Roosevelt & Lilly LLP

C. Good Faith (cont.)

• f. promises of investment returns of 468% coupled

with the debtor’s use of post-dated checks to investors, and checks returned to investors with insufficient funds, see Jobin, 84 F.3d at 1338-39

• g. knowledge that the transfer received as “grossly

in excess of the value” the transferee had provided, In re Agric. Res. & Tech. Grp., 916 F.2d at 539

40 Finlayson Williams Toffer Roosevelt & Lilly LLP

D. For Value

• 1. 11 U.S.C. § 548(d)(2) defines value as “property, or

satisfaction or securing of a present or antecedent debt of the debtor . . .”

• 2. “Property” means a reasonably equivalent exchange
• f consideration.
• 3. In the vast number of Ponzi scheme cases,

defendants can establish “value” by arguing that the principal they recovered from the Ponzi debtor was in satisfaction of an antecedent debt because the nature of the initial investment In the Ponzi scheme gave rise to a claim.

41 Finlayson Williams Toffer Roosevelt & Lilly LLP

D. For Value

• 4. Thus, attempts to argue in Stanford, that the

unequal distribution of the Ponzi debtor’s assets creates an unjust enrichment of certain creditors relative to others warranting disgorgement by those who received more than others, creditors of a Ponzi scheme whose initial investment with the debtor gave rise to a claim against the debtor are entitled to recover up to the amount of principal they invested if they acted in “good faith”.

42 Finlayson Williams Toffer Roosevelt & Lilly LLP

D. For Value (cont.)

• 5. False Profits: The cases are uniform, however, in

concluding that incremental amounts recovered by the transferee over the face amount invested are subject to disgorgement. In essence, “fictitious profits” received by creditors can be disgorged because courts conclude that since the debtor’s

• perations were fraudulent, the defendant lacks the

basis to maintain that it actually was entitled to any profits; thus amounts paid as such cannot be “for value.” Merrill v. Abbott (In re Independent Clearing House Co.), 77 B.R. 843 (D.Utah 1987) (en banc)

43 Finlayson Williams Toffer Roosevelt & Lilly LLP

D. For Value (cont.)

• 6. Contrasting Debt with Equity Investments: But

what if the investment with the Ponzi entity does not give rise to a claim against the debtor, but instead is made as an equity infusion giving rise to an “interest in” the debtor, such as a limited partnership interest or limited liability membership. Many hedge funds and private equity funds are so structured. If the investment is made as equity, how can the defendant establish “for value” based on satisfying an “antecedent debt”?

44 Finlayson Williams Toffer Roosevelt & Lilly LLP

D. For Value (cont.)

• a. So how have the courts handled the “interest in”

Ponzi cases as distinct from the “claims against” Ponzi cases.

• b. Almost all the reported cases have involved

claims, not interests.

• c. Courts starting with Eby v. Ashley, 1 F.2d 971

(4th Cir. 1924), cert. denied, 266 U.S. 631, 45 S.

• Ct. 197, 69 L. Ed. 478 (1925), established the

notion that distributions made to investors who lent money (i.e. creating a claim) also gave rise to a tort “claim” for fraud and rescission.

45 Finlayson Williams Toffer Roosevelt & Lilly LLP

D. For Value (cont.)

• d. Two reported Ponzi cases, In re AFI Holding, Inc.,

525 F. 3d 700 (9th Cir. 2008) and Perkins v. Haines, 661 F.3d 623 (11th Cir. 2011), have found that the result in equity investment cases should be the same.

• e. Supporting distinction in treatment of claims vs.

interests is: In re Terry Mfg. Co., Inc., 2007 WL 274319 (Bankr. M.D. Ala. 2007).

46 Finlayson Williams Toffer Roosevelt & Lilly LLP

SPECIFIC DEFENSES

 “Mere Conduit” Defense  Section 546(e)  Withdrawal of Reference  Standing

47

Mere Conduit: Who is an initial

• r mediate transferee under
• Sec. 448:



“Initial” or “Mediate” Transferees –decision based definitions:

 Judge Easterbrook’s seminal discussion in Bonded Fin.

Servs., 838 F.2d at 894 -- recipient can be found to be an “initial transferee” within the meaning of the statute only if transferred funds are received into the transferee’s unfettered “discretion and control,” such that the funds may be spent on, for instance, “lottery tickets or uranium stocks.”

 Judge Lifland’s decision in Bear Sterns Sec. Corp. v. Gredd

(“Gredd II”), 397 B.R. 1, 14 (S.D.N.Y. 2007) (a) is a “mere conduit,” acting as “an uninterested agent between the transferor and another entity, or if it (b) lacks “dominion and control” over the funds.

48

…Mere Conduit Defense

 Dominion and Actual Control test is Widely Adopted:  Bonded Fin. Servs, Inc. v.European Am. Bank remains the

starting point. 838 F.2d 890, 893 (7th Cir. 1998): a transferee must be capable of using funds “for its own purposes” to have transferee liability.

 In re Finley, 130 F.3d at 59 (2d Cir. 1997) adopting Bonded

Financial Test

 Andreini & Co. v. Pony Express Delivery Servs. (In re Pony

Express Delivery Servs.), 440 F.3d 1296, 1303 (11th Cir. 2006) (requiring “unrestricted legal control” over funds)

49

…Mere Conduit Defense

 But one very fact-specific case from Judge Lifland in

NY rejected a mere conduit defense suggesting right to control is the test and exercise of that control is not

• necessary. Bear, Stearns Sec. Corp. v. Gredd (In re

Manhattan Inv. Fund III), 397 B.R. 1, 4-6 (S.D.N.Y. 2007).

 Manhattan Investment’s reasoning has been rejected

by other Courts: See, e.g., Grayson Consulting, Inc. v. Wachovia Securities LLC (In re Derivium Capital LLC), 437 B.R. 798, 808-09 (Bankr. D.S.C. 2010)

50

Section 546(e) Defense

 Section 546(e): the trustee may not

avoid . . . a settlement or margin payment made by or to (or for the benefit of) a . . . stockbroker . . . [or] financial institution . . . in connection with a securities contract." 11 U.S.C. § 546(e).

51

Section 546(e) Transactions

 A "stockbroker" is a "person-(A) with respect to which there is a

customer . . . and (B) that is engaged in the business of effecting transactions in securities." 11 U.S.C. § 101(53A). ”Financial Institution” is defined broadly to include an entity that is a commercial or savings

• bank. § 101(22)

 A "securities contract," in turn, is defined at length in sections

741(7)(A)(i)-(xi) of the Code as, inter alia, "a contract for the purchase, sale, or loan of a security." § 741(7)(A)(i)-(xi).

 “Settlement Payments”: Broadly defined and commonly construed to as

any transfer that concludes a securities transaction. See, e.g., Alfa, S.A.B. de C.V. v. Enron Creditors Recovery Corp. (In re Enron Creditors Recovery Corp.), 422 B.R. 423, 436 (S.D.N.Y. 2009) (also noting the breadth of the term “securities transaction”); Enron Corp. v. Int’l Fin. Corp. (In Re Enron Corp.), 341 B.R. 451, 456 (Bankr. S.D.N.Y. 2006) (“in securities industry, any transfer of cash or securities to complete a securities transaction in considered a settlement payment”) (internal quotations omitted).

52

Section 546(e) Transactions

 Section 546(e) was intended to

promote stability and instill investor confidence in the commodities and securities markets. See H. Rep. No. 97-420, at 1 (1982), reprinted in 1982 U.S.C.C.A.N 583, 583 (stating the purpose of 546(e), as amended, is to protect "the stability of the market").

53

Section 546(e) Cases

 Recent Cases: Picard v. Katz, 462 B.R.

447 (S.D.N.Y. 2011); Picard v. J. Ezra Merkin, 11 MC 0012 (KMW) (S.D.N.Y.

• Aug. 31, 2011)

 Geltzer v. Mooney (In re: MacMenamin’s

Grill Ltd.), 450 B.R. 414 (Bankr. S.D.N.Y. April 21, 2011) (RDD); Picard v. Merkin (In re BMIS), 2010 WL 4643102 (Bankr. S.D.N.Y. Nov. 17, 2010).

54

Other Defenses: Jurisdiction/Venue, Withdrawal

• f Reference and Standing

 Where should claims be brought--

District Court vs. Bankruptcy Court?

 Other Choice of Forum and Choice of

Law Issues when Off-shore Investment Vehicles are Involved

55

Withdrawal of the Reference

 Motion to Withdraw: motions to

withdraw cases from Bankruptcy court into Federal district court

56

Grounds for Withdrawal

Mandatory Withdrawal

 Where movant shows that,

absent withdrawal, bankruptcy judge would be obliged “to engage in significant interpretation, as opposed to simple application, of federal laws apart from the bankruptcy statutes.” Permissive Withdrawal

 Generally in the

court’s discretion.

57

Withdrawal Decisions

 A number of references have been

withdrawn by two Judges in BLMIS case

 Becoming less of a hotbed of dispute

(at least in Madoff cases)

58

Withdrawal Decisions

 Picard v. Alpha Prime Fund Ltd.,11 Civ. 836

(JSR), Order dated Mar. 25, 2011

 Picard v. JPMorgan Chase, et al., No. 11

• Civ. 913 (CM), Order Dated May 23, 2011

 Picard v. HSBC Bank PLC et al., No. 11

• Civ. 763 (JSR), Order dated June 6, 2011

 Picard v. Katz, No. 11 Civ. 3605 (JSR),

Order dated July 5, 2011

 Picard v. Flinn Invs., LLC, 11 Civ. 5223

(JSR), Order dated Nov. 28, 2011

59

To Date, Specific Grounds for Withdrawing

 Whether Trustee has standing to bring common law

claims.

 Whether the Trustee’s action is a “covered class

action” that is preempted by SLUSA.

 Whether § 546(e) prevents the Trustee from avoiding

fraudulent transfers except under § 548(a)(1)(A)

 Whether the reports BLMIS issued created an

antecedent debt

60

To Date, Specific Grounds for Withdrawing

 Whether the Trustee can avoid mandatory

withdrawals from IRAs as fraudulent

 Whether under Stern v. Marshall, the bankruptcy

court has the authority to render a final judgment or preliminary findings of fact and conclusions of law in the avoidance actions

61

STANDING



Applicable to common law claims asserted by Trustee’s (e.g., claims for common law fraud, aiding and abetting, conversion, breach of fiduciary duty, unjust enrichment)



Picard v. JP Morgan Chase & Co., 460 B.R. 84 (S.D.N.Y. 2011) and Picard v. HSBC Bank PLC, 454 B.R. 25 (S.D.N.Y. 2011)



Key Rulings:

1. Trustee lacks standing to pursue claims that properly belong to creditors. He is only empowered to pursue claims that properly belonged to the debtor before it entered into Bankruptcy. 2. Debtor cannot pursue because of in pari delicto (see Kirschner v. KMPG LLP, 15 N.Y.3d 446, 464 (2010)). 3. Subrogation contribution theories will not work.

• But see Colbalt Multifamily Investors I, LLC v. Shapiro, 6 Civ. 6468 (KMW)

(S.D.N.Y. March 7, 2012) (suggesting different result in Connecticut and N.J.) 62

Thank You

 Anthony L. Paccione, Chair NY Litigation

Department, Katten Muchin Rosenman LLP

anthony.paccione@kattenlaw.com 212.940.8502

 Corey Weber, Partner, Ezra Brutzkus Gubner LLP

cweber@ebg-law.com 818-827-9122

 Jesse S. Finlayson, Partner, Finlayson Williams

Toffer Roosevelt & Lilly LLP

jfinlayson@fwtrl.com 949-759-3810

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