Picard v. Maxam - 2d Cir. - SIPC Brief - MadoffTrustee€¦ · United States Court of Appeals ... the China Trade Test Cannot Be Met Here ... Hong Kong & Shanghai Banking Corp., Ltd

12-2194-bk

IN THE

United States Court of Appeals FOR THE SECOND C IRCUIT

IN RE: BERNARD L. MADOFF Investment Securities LLC, Debtor.

MAXAM ABSOLUTE RETURN FUND LIMITED,

Appellant, —against—

IRVING H. PICARD, Trustee for Substantively Consolidated SIPA Liquidation of Bernard L.

Madoff Investment Securities LLC, and the Estate of Bernard L. Madoff

Trustee-Appellee,

SECURITIES INVESTOR PROTECTION CORPORATION, Statutory Intervenor under 15 U.S.C. section 78eee(d),

Intervenor.

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK

BRIEF OF INTERVENOR

SECURITIES INVESTOR PROTECTION CORPORATION

OF COUNSEL: KEVIN H. BELL Senior Associate General Counsel for Dispute Resolution LAUREN T. ATTARD Assistant General Counsel

JOSEPHINE WANG General Counsel SECURITIES INVESTOR PROTECTION CORPORATION 805 15th Street, N.W., Suite 800 Washington, D.C. 20005 Telephone: (202) 371-8300

Attorneys for Intervenor Securities Investor Protection Corporation

Case: 12-2194 Document: 58 Page: 1 12/11/2012 791573 30

CORPORATE DISCLOSURE STATEMENT

In accordance with Rule 26.1(a) of the Federal Rules of Appellate

Procedure, the Securities Investor Protection Corporation hereby states that it has

no parent corporation and there is no publicly held corporation owning 10% or

more of stock in the Securities Investor Protection Corporation.


TABLE OF CONTENTS

PAGE

STATEMENT OF THE ISSUE ................................................................................. 1

STATEMENT OF THE CASE .................................................................................. 2

STATEMENT OF FACTS ........................................................................................ 2

A. Commencement of the SIPA Proceeding ........................................ 2

B. The Trustee’s Compliant Against MAXAM .................................... 3

C. The Cayman Action .......................................................................... 6

D. Order to Show Cause and the Bankruptcy Court Decision .............. 7

E. The District Court Decision .............................................................. 9

STANDARD OF REVIEW ..................................................................................... 10

SUMMARY OF THE ARGUMENT ...................................................................... 10

ARGUMENT ........................................................................................................... 11

I. The Cayman Action Is In Derogation of The Stays ............................ 11

II. The SIPA Stay, Like The Bankruptcy Code Automatic Stay, Functions Extraterritorially ...................................... 13 A. If Applicable, the China Trade Test Cannot Be Met Here ............ 15

CONCLUSION ........................................................................................................ 22


ii

TABLE OF AUTHORITIES

CASES: PAGE

In re A.R. Baron & Co., 226 B.R. 790 (Bankr. S.D.N.Y. 1998) ............................. 18 Barton v. Barbour, 104 U.S. 126 (1881) ................................................................... 8 Benz v. Compania Naviera Hidalgo, S.A., 353 U.S. 138 (1957) ............................. 13 In re Bernard L. Madoff Investment Securities LLC,

654 F.3d 229 (2d Cir. 2011) .......................................................................... 17 In re Bernard L. Madoff Investment Securities, LLC, 424 B.R. 122

(Bank. S.D.N.Y. 2010), aff’d, 654 F.3d 229 (2d Cir. 2011), cert. dismissed, 132 S. Ct. 2712 (2012), and cert. den., 133 S.Ct 24 and 133 S.Ct. 25 (June 25, 2012) ............................. 17

China Trade & Development Corp. v. M.V. Choong Yong,

837 F.2d 33 (2d Cir. 1987) ............................................................ 9, 15-16, 21 Cumberland Oil Corp. v. Thropp, 791 F.2d 1037 (2d Cir.),

cert. den., 479 U.S. 950 (1986) ..................................................................... 13 EEOC v. Arabian American Oil Co., 499 U.S. 244 (1991) ..................................... 13 FDIC v. Hirsch (In re Colonial Realty Co.), 980 F.2d 125 (2d Cir. 1992) ............. 13 First Nat. Bank in Houston, Texas v. Lake, 199 F.2d 524

(4th Cir. 1952), cert. den., 344 U. S. 914 (1953) .......................................... 11

In re French, 440 F.3d 145 (4th Cir.) cert denied., 549 U.S. 815 (2006) ............... 13 In re Globo Comunicacoes e Participacoes S.A., 317 B.R. 235 (S.D.N.Y. 2004) .. 14 Hong Kong & Shanghai Banking Corp., Ltd. v. Simon

(In re Simon), 153 F.3d 991 (9th Cir. 1998), cert. denied, 525 U.S. 1141 (1999) ............................................................................................................ 14


iii

TABLE OF AUTHORITIES (cont.)

CASES: PAGE

In re Metromedia Fiber Network, Inc., 416 F.3d 136 (2d Cir. 2005) ..................... 10 Morrison v. National Australia Bank Ltd., __U.S.__, 130 S.Ct. 2869 (2011) ........ 13 In re MortgageAmerica Corp., 714 F.2d 1266 (5th Cir. 1983) ............................... 13 Nakash v. Zur (In re Nakash), 190 B.R. 763 (Bankr. S.D.N.Y. 1996) .................... 14 SEC v. Packer, Wilbur & Co., 498 F.2d 978 (2d Cir. 1974) ................................... 18

SIPC v. Barbour, 421 U.S. 412 (1975) .................................................................... 11 SIPC v. Blinder, Robinson & Co., Inc., 962 F.2d 960 (10th Cir 1992) ............. 11-12 SIPC v. BLMIS, 474 B.R. 76 (S.D.N.Y. 2012) .................................................... 9, 17

Torres v. Eastlick (In re North American Coin & Currency, Ltd.), 767 F.2d 1573 (9th Cir. 1985) ....................................................................... 15


iv

TABLE OF AUTHORITIES (cont.)

STATUTES AND RULES: PAGE

Securities Investor Protection Act, as amended, 15 U.S.C. ' 78eee(b)(2)(A) ............................................................................................. 14, 15, 20 78eee(b)(2)(A)(i) .................................................................................................. 8, 14 78eee(b)(2)(A)(ii) ................................................................................................. 8, 20 78eee(b)(2)(B) .......................................................................................................... 13 78eee(b)(2)(B)(i) .............................................................................................. 2, 8, 11 78eee(b)(4) ................................................................................................................. 2 78eee(d) ...................................................................................................................... 1 78fff-2(b) ............................................................................................................ 17, 18 78fff-2(c)(1) ................................................................................................. 15, 17, 18 78fff-2(c)(3) ............................................................................................................. 19 78fff-3(a) .................................................................................................................. 18 78lll(4) ...................................................................................................................... 17 78lll(4)(D) ................................................................................................................ 18 United States Bankruptcy Code, 11 U.S.C. § 105(a) ......................................................................................................................... 9 362 .............................................................................................................................. 8 362(a) ......................................................................................................... 2, 9, 11, 13 541(a)(1) ............................................................................................................. 14, 20 726(b) ....................................................................................................................... 15 LEGISLATIVE MATERIALS: H.R. Rep. No. 95-595 (1997) ................................................................................... 12 Securities Investor Protection Act Amendments: Hearing on H.R. 8331

before the Subcomm. on Securities of the S. Comm. on Banking, Housing, and Urban Affairs, 95th Cong. 25 (1978) ....................................................................................... 11


This is an appeal in the liquidation proceeding of Bernard L. Madoff

Investment Securities LLC (“BLMIS”) under the Securities Investor Protection

Act, 15 U.S.C. § 78aaa et seq. (“SIPA”).1 Under SIPA section 78eee(d), the

Securities Investor Protection Corporation (“SIPC”) is deemed to be a party in

interest as to all matters arising in a SIPA proceeding, with the right to be heard on

all such matters. SIPC submits this brief in support of the position of the Trustee

in this case (the “Trustee”), and in opposition to the appeal of Maxam Absolute

Return Fund Limited (“Maxam Limited”). Although there are many grounds upon

which the lower court’s decision can be upheld, the focus in this brief is on those

that involve in particular an application of SIPA.

STATEMENT OF THE ISSUE

This appeal presents the following issue:

Whether a district court properly upholds an order of a bankruptcy court enforcing the automatic stay under the Bankruptcy Code and enjoining a foreign suit where 1) the foreign suit asks a foreign court to decide an action pending in bankruptcy court; 2) the bankruptcy court action is property of the estate, and the automatic stay stays any act to exercise control over property of the estate; and 3) in seeking to have the foreign court decide the bankruptcy court action, the plaintiff in the foreign suit has sued the SIPA trustee in violation of provisions of SIPA that stay suits against the trustee, and in any event, give the bankruptcy court exclusive jurisdiction over such suits.

SIPC submits that the foreign suit correctly is enjoined. 1 References hereinafter to provisions of SIPA shall be to the United States Code and, for convenience, shall omit “15 U.S.C.”


2

STATEMENT OF THE CASE

This appeal arises out of Maxam Limited’s unsuccessful attempt to

adjudicate in the Cayman Islands a challenge to the avoidance action brought by

the Trustee against Maxam Limited as part of the SIPA liquidation proceeding of

BLMIS in the United States Bankruptcy Court for the Southern District of New

York (“Bankruptcy Court”).

STATEMENT OF FACTS

A. Commencement of the SIPA Proceeding

On December 15, 2008, upon an application by SIPC, the United States

District Court for the Southern District of New York (“District Court”) entered an

order (“Protective Order”) placing BLMIS in liquidation under SIPA, appointing

the Trustee, and consistent with SIPA section 78eee(b)(4), removing the

liquidation proceeding to the Bankruptcy Court.2 In the Protective Order, the

District Court notified “all persons and entities” that the automatic stay provisions

of section 362(a) of title 11 of the United States Code (“Bankruptcy Code”)

operate as a stay of “any act to obtain possession of property of the estate or

property from the estate,” and “that pursuant to 15 U.S.C. § 78eee(b)(2)(B)(i), . . .

2 Order entered December 15, 2008, Securities and Exchange Commission v. Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC, No. 08-CV-10791, Docket No. 4 (S.D.N.Y.).


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any other suit against any . . . trustee of the Defendant or its property, is stayed.”

Id.

B. The Trustee’s Complaint against Maxam

In the underlying action, the Trustee for BLMIS seeks to recapture stolen

BLMIS customer funds from, among others, Sandra L. Manzke (“Manzke”), the

founder and part owner of Maxam Capital Management LLC (“Maxam Capital”),

an investment management company that managed two funds that Manzke created:

Maxam Absolute Return Fund, L.P. (“Maxam LP”), a domestic feeder fund, and

Maxam Limited, a foreign fund that invested all of its money with Maxam LP.

Trustee’s Complaint (“Complaint”) at Joint Appendix A-33-34, 45, 47 at ¶¶ 5, 38,

42.3 Manzke and the aforementioned Maxam entities are defendants in this suit

together with Maxam Capital GP LLC (“Maxam GP”), the general partner of the

two Maxam funds; Sandra L. Manzke Revocable Trust (“Manzke Trust”); Manzke

as trustee of the Manzke Trust; Suzanne Hammond, the managing partner and a

part owner of Maxam Capital; Walker Manzke (“Walker”), the son of Sandra

Manzke; and April Bukofser Manzke (“April”), Walker’s spouse. Walker and his

wife both worked at Maxam Capital, Walker as an analyst, and his wife as chief

compliance officer of the firm. Id. at A-33-35, 49-50 at ¶¶ 5, 8, 9, 46, 47, 49.

3 References herein to pages of the Joint Appendix shall be to “A-__.”


4

The Trustee alleges that Maxam LP, the Manzke domestic feeder fund,

opened an account at BLMIS; that it thereafter withdrew monies from the account;

and that it transferred the monies to, among others, the Defendants. Id. at A-37-38,

45, 54, 84-85 at ¶¶ 15, 37, 63, 150. The only investments made by Maxam LP

were through Maxam LP’s BLMIS account and were done despite numerous red

flags as to the legitimacy of BLMIS that were obvious to the Defendants, but were

ignored by them. See, e g., Complaint at A-36-38, 45, 54 at ¶¶ 12-13, 16, 37, 38,

64.

In the roughly two year period before BLMIS failed, Maxam LP assertedly

withdrew $97.8 million from its BLMIS account which included $25 million

withdrawn within 90 days prior to the failure of BLMIS. Maxam LP distributed

the $25 million to Maxam Limited which in turn sent the monies to its investors

abroad, including investors in Ireland, Luxembourg and Switzerland. Complaint at

A-37-38, 86 at ¶¶ 15, 157. It was from Maxam LP’s BLMIS account that all of the

Defendants received the transfers of customer monies and, ultimately, their profits.

Thus, the transfers included the initial withdrawal of the $97.8 million by Maxam

LP and subsequent transfers by Maxam LP from those monies not only of the $25

million to Maxam Limited, but also allegedly of more than $5.8 million in

“management” and administrative fees received by the remaining Defendants. The

more than $5.8 million in fees was transferred from Maxam LP and Maxam


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Limited to Maxam Capital which in turn transferred the moneys to Manzke,

Hammond, Walker, and April, in the form of distributions, dividends, salaries,

bonuses, and other compensation. This was done even though Maxam LP

effectively surrendered all management responsibilities to the principal of BLMIS,

Bernard Madoff. Id. at A-37, 43, 55, 72, 85-87, AT ¶¶ 14, 32, 67, 68, 117, 152,

157, 158.

Because BLMIS ran a Ponzi scheme, none of the funds received by Maxam

LP were generated through investment, but instead were stolen customer monies.

The Trustee’s Complaint asserts nine counts for recovery of preferences and

fraudulent transfers from Maxam LP as initial transferee and the remaining

Defendants, including Maxam Limited, as subsequent transferees. Because

Maxam LP filed a customer claim in the BLMIS liquidation, the Complaint also

asserts two separate counts for disallowance and equitable subordination of

Maxam LP’s customer claim. The two additional counts for imposition of a

constructive trust and for unjust enrichment were dismissed. See Stipulation and

Order entered August 30, 2011, Picard v. Maxam Absolute Return Fund, L.P., 11-

cv-03261, Docket No. 27.

On July 11, 2011, counsel for Maxam Limited entered an appearance in the

Bankruptcy Court action and filed a corporate ownership statement therein, and an

answer to the complaint. See Docket Sheet, Picard v. Maxam Absolute Return


6

Fund Ltd. (10-05342-BRL), at A-12, Docket Nos. 29-32; and Defendants’ Answer,

at A-366. On August 1, 2011, Maxam Limited and other defendants in the case

filed an amended answer to the complaint. See Amended Answer, at A-433. On

October 20, 2011, Maxam Limited moved for a withdrawal of the reference of the

matter to the Bankruptcy Court, and for a transfer of the case to the District

Court. See Docket Sheet, Picard v. Maxam Absolute Return Fund Ltd. (10-05342-

BRL), at A-16, Docket No. 59.

The District Court granted Maxam Limited’s motion. See Order, dated

March 14, 2012, at A-998.

C. The Cayman Action

On July 11, 2011, on the same date that it appeared, by counsel, in the

Bankruptcy Court action, Maxam Limited sued the Trustee in the Grand Court of

the Cayman Islands (the “Cayman Action”), seeking the following relief:

(1) A declaration that the [Maxam Limited] is not liable in respect of the sum of US$25,000,000 received by the Plaintiff from [Maxam LP] within the period of 90 days prior to 11th December 2008;

(2) A declaration that the [Maxam Limited] is not liable to the Defendant in respect [sic] such amount (if any is alleged by the Defendant) in excess of the US$25,000,000 referred to in (1) above received by the Plaintiff from [Maxam LP] within the period of 2 years prior to 11th December 2008;

(3) Such further or other relief as the court shall consider appropriate;

(4) Costs.


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See Summons at A-474-75.

D. Order to Show Cause and the Bankruptcy Court Decision

On September 22, 2011, upon an application by the Trustee, the Bankruptcy

Court issued an order directing Maxam Limited to show cause why the Court

should not grant the Trustee an injunction declaring the Cayman Action to be in

violation of the automatic stay, stay orders issued by the District Court, and SIPA.

See Order to Show Cause at A-569. In applying to the Bankruptcy Court for the

the injunction, the Trustee had noted Maxam Limited’s substantial contacts in the

United States. These included not only Maxam Limited’s participation in the

avoidance suit against it, but its pre-lawsuit related activity as well such as: the

management of its operations by Maxam Capital out of an office in Connecticut;

its participation in an investment management agreement with Maxam Capital that

designated New York law as the applicable law of the contract and consent to the

non-exclusive jurisdiction of the New York courts; the inclusion on its Board of

Suzanne Hammond, of Connecticut; and the investment of its funds into Maxam

LP, the domestic Manzke fund and client of BLMIS. See Declaration of Marc D.

Powers, at A-463, A-469-70.4 After briefing and a hearing, the Bankruptcy Court

granted the application. See Order at A-595-98. In an accompanying

4 As stated in later pleadings by Maxam Limited’s counsel, “MAXAM Limited’s only assets are in the United States.” See A-601 and A-604.


8

memorandum (“Bankruptcy Court Memorandum”), the Bankruptcy Court

observed that “[t]he Cayman Action is a clear attack on this Court’s exclusive

jurisdiction and a blatant attempt to hijack the key issues to another court for

determination.” See Bankruptcy Court Memorandum at A-576. The Court based

its decision on the following.

First, the Bankruptcy Court found that the Cayman Action violated the

automatic stay in section 362 of the Bankruptcy Code because it “usurp[s] causes

of action belonging to the estate . . . .” Id. at A-577-78.

Second, the Bankruptcy Court found that the Cayman Action violated at

least one stay order entered by the District Court, including the stay order entered

in SEC v. Bernard L. Madoff, 08-civ-10791, Docket No. 4. See Bankruptcy Court

Memorandum at A-581.

Third, the Bankruptcy Court found that the Cayman Action violated the

Barton doctrine, which requires that a party who wishes to sue a court-appointed

receiver first seek leave of the court that appointed the receiver. See Barton v.

Barbour, 104 U.S. 126 (1881). See also Bankruptcy Court Memorandum at A-581-

82.

Fourth, the Bankruptcy Court found that the Cayman Action violated SIPA

sections 78eee(b)(2)(A)(i) and (b)(2)(A)(ii), which confer exclusive jurisdiction on


9

the District Court of the debtor and its property, wherever located, and of any suit

against the trustee with respect to a liquidation proceeding. Id. at A-582.

The Court granted an injunction under section 105(a) of the Bankruptcy

Code and section 362(a) of the Bankruptcy Code, noting the “substantial threat”

that the Cayman Action presented to the Court’s jurisdiction. Id. at A-583-94.

E. The District Court Decision

The District Court affirmed, and held that the Bankruptcy Court injunction

had extraterritorial effect. Observing that courts consistently have held that the

stay has extraterritorial effect “by way of in personam jurisdiction over those who

would take actions prohibited by the stay,” see SIPC v. BLMIS, 474 B.R. 76, 84

(S.D.N.Y. 2012), the Court rejected Maxam Limited’s arguments that the

injunction should be reversed in the interest of comity. Id. at 85-87. The Court

examined the factors set forth in China Trade & Development Corp. v. M.V.

Choong Yong, 837 F.2d 33 (2d Cir. 1987), and concluded that they could not be

met because of, inter alia, “the Cayman Action’s threat ‘to erode the strong public

policies underlying SIPA, namely, protecting investors and their faith in the

securities market by expeditiously returning customer funds to investors.’” Id. at

87.


10

STANDARD OF REVIEW

The Court of Appeals exercises plenary review over the decisions of the

District Court and Bankruptcy Court, and reviews conclusions of law de novo and

findings of fact for clear error. In re Metromedia Fiber Network, Inc., 416 F.3d

136, 139 (2d Cir. 2005).

SUMMARY OF ARGUMENT

This is a simple case of a defendant in a Bankruptcy Court action filing a

suit for declaratory judgment in a foreign court hoping for a better outcome there.

In the Bankruptcy Court, the Trustee sued Maxam Limited, along with other

related defendants, for recovery of customer property received as part of the

BLMIS Ponzi scheme. Subsequently, despite having participated in the

Bankruptcy Court action, Maxam Limited sued the Trustee in the Cayman Islands,

asking for a declaration that Maxam Limited not be deemed liable to the Trustee or

that its liability otherwise be limited. The Cayman Action was filed in violation of

stays imposed under a District Court Order, SIPA, and the Bankruptcy Code. One

of those authorities would have been sufficient to justify the injunction by the

Bankruptcy Court. Taken together, they offer abundant proof of Maxam Limited’s

cavalier disregard of the law. The Cayman Action is a clear end-run around the

jurisdiction of the United States courts in the BLMIS Ponzi scheme. As such, the


11

Bankruptcy Court had a number of reasons to enjoin the Cayman Action, and the

District Court correctly agreed.

ARGUMENT

I. THE CAYMAN ACTION IS IN DEROGATION OF THE STAYS

Under SIPA, the filing of a protective decree “shall stay . . . any other suit

against any . . . trustee of the debtor or its property….” SIPA § 78eee(b)(2)(B)(i)

(emphasis added). See SIPC v. Barbour, 421 U.S. 412, 416 (1975) (“The mere

filing of an SIPC application gives the court in which it is filed exclusive

jurisdiction over the member and its property, wherever located, and requires the

court to stay ‘. . . any other suit against any receiver, conservator, or trustee of the

[member] or its property….’” (quoting SIPA § 78eee(b)(2)).5 Similarly, under

Bankruptcy Code section 362(a), the filing of the application under SIPA “operates

as a stay, applicable to all entities of . . . (3) any act to obtain possession of

property of the estate or of property from the estate or to exercise control over

property of the estate . . . .” See SIPC v. Blinder, Robinson & Co., 962 F.2d 960,

5 SIPA was amended in 1978 to include Section 78eee(b)(2)(B)(i) as an express incorporation of the stay under former section 116(4) of the Bankruptcy Act against “the commencement ...of a suit against the...trustee....” See Securities Investor Protection Act Amendments: Hearing on H.R. 8331 before the Subcomm. on Securities of the S. Comm. on Banking, Housing, and Urban Affairs, 95th Cong. 25 (1978). One of the purposes of this stay was to protect the trustee against harassing actions that would impede his administration of the proceeding. See First Nat. Bank in Houston, Texas v. Lake, 199 F.2d 524, 528 (4th Cir. 1952), cert. den., 344 U. S. 914 (1953).


12

965 (10th Cir. 1992) (“From the standpoint of the customers, the automatic stay

provision of the Bankruptcy Code that took effect upon the filing of the Chapter 11

petition prevented them from taking virtually any action to collect debts owed to

them or to recover their property held by the broker-dealer.”). In the Order placing

BLMIS into liquidation, the District Court reaffirmed the stays that applied to this

case, including a stay of “any other suit against any . . . trustee of the Defendant or

its property.” See Protective Order entered December 15, 2008, Securities and

Exchange Commission v. Bernard L. Madoff and Bernard L. Madoff Investment

Securities LLC, No. 08-CV-10791, Docket No. 4 (S.D.N.Y.), at 3.

Stays under SIPA and the Bankruptcy Code are imposed for customer and

other creditor protection. Without them, “certain creditors would be able to pursue

their own remedies against the debtor’s property. Those who acted first would

obtain payment of the claims in preference to and to the detriment of other

creditors.” H.R. Rep. No. 95-595, at 340 (1977). The stays thus further the

objective of bankruptcy of “an orderly liquidation procedure under which all

creditors are treated equally.” Id. The stays ensure that property is available to be

distributed to customers and general creditors in accordance with SIPA. The

SIPA stay of suits against the trustee ensures that the trustee is able to administer

the liquidation of the debtor in an orderly fashion, without having to defend against

a multiplicity of law suits that interfere with the performance of his duties.


13

The Cayman Action is a suit against the Trustee, and an attempt to exercise

control over the suit brought by the Trustee, which is property of the estate. See In

re MortgageAmerica Corp., 714 F.2d 1266, 1275 (5th Cir. 1983) (holding that a

fraudulent transfer action belongs to the bankruptcy estate) cited with approval in

FDIC v. Hirsch (In re Colonial Realty Co.), 980 F.2d 125, 131 (2d Cir. 1992) and

Cumberland Oil Corp. v. Thropp, 791 F.2d 1037, 1042 (2d Cir.), cert. den., 479

U.S. 950 (1986). As such, the Cayman Action is a clear violation of the stays in

SIPA § 78eee(b)(2)(B), the Bankruptcy Code section 362(a), and the stay issued by

the District Court in the Protective Order.

II. THE SIPA STAY, LIKE THE BANKRUPTCY CODE AUTOMATIC STAY, FUNCTIONS EXTRATERRITORIALLY

When Congress has clearly expressed an affirmative intention to give a

statute extraterritorial effect, the courts are obliged to respect that intention and to

apply the statute abroad. See Morrison v. National Australia Bank Ltd., ___ U.S.

___, 130 S.Ct. 2869, 2877 (2011); EEOC v. Arabian American Oil Co., 499 U.S.

244, 248 (1991); Benz v. Compania Naviera Hidalgo, S.A., 353 U.S. 138, 147

(1957); In re French, 440 F.3d 145, 151 (4th Cir. 2006), cert. den., 549 U.S. 815

(2006).

SIPA and the Bankruptcy Code both contain provisions creating exclusive,

in rem jurisdiction in the United States bankruptcy courts over, respectively,

“property of the debtor” and “property of the estate.” See SIPA §


14

78eee(b)(2)(A)(i); Bankruptcy Code § 541(a)(1). Moreover, both provisions

contain language indicating unequivocally that Congress intended the bankruptcy

courts’ jurisdiction to operate on a worldwide basis, extending to property of the

debtor and estate “wherever located.” SIPA § 78eee(b)(2)(A)(i); Bankruptcy Code

§ 541(a)(1). In accord with this language, and the intent behind it, the courts in

this jurisdiction have long recognized that the Bankruptcy Code’s in rem

jurisdictional provision applies extraterritorially. See, e.g., In re Globo

Comunicacoes e Participacoes S.A., 317 B.R. 235, 250 (S.D.N.Y. 2004)

(“Congress intended these jurisdictional provisions to have global reach.”), citing

Hong Kong & Shanghai Banking Corp., v. Simon (In re Simon), 153 F.3d 991, 996

(9th Cir. 1998), cert. den., 525 U.S. 1141 (1999); Nakash v. Zur (In re Nakash),

190 B.R. 763, 768 (Bankr. S.D.N.Y. 1996) (“[L]egislative history makes clear

Congress’ intent that ‘wherever located’ language be broadly construed to include

property located in and outside of the U.S.”). The language of SIPA is even more

explicit - specifically extending a bankruptcy court’s in rem jurisdiction to

“property located outside the territorial limits of such court”6 - and the existence of

6 SIPA Section 78eee(b)(2)(A) provides, in pertinent part, that:

Upon the filing of an application with a court for a protective decree with respect to a debtor, such court –


15

a clear Congressional intent in favor of extraterritorial application of SIPA’s in rem

jurisdictional provision therefore is not in question. See SIPA § 78eee(b)(2)(A).

Moreover, vesting the bankruptcy courts with worldwide jurisdiction over

estate property is essential to effectuate the liquidation provisions of both the

Bankruptcy Code and SIPA. Both statutes divide estate creditors into classes and

provide for the allocation of estate property to creditors in each class. Property

allocable to each class generally is then distributed ratably among the creditors in

the class on the basis of the respective amounts of their allowed claims. See SIPA

§ 78fff-2(c)(1); 11 U.S.C. § 726(b) (providing for pro rata distribution of estate

property among creditors of same class); Torres v. Eastlick (In re North American

Coin & Currency, Ltd.), 767 F.2d 1573, 1575 (9th Cir. 1985) (“Ratable distribution

among all creditors is one of the strongest policies behind the bankruptcy laws”).

An overriding objective of both SIPA and the Bankruptcy Code thus is the equal

treatment of similarly situated creditors.

A. If Applicable, the China Trade Test Cannot Be Met Here

Because the Cayman Action interferes with property of the estate, as stated

above, this Court’s inquiry need go no further. Nonetheless, the Cayman Action is

not prohibited by this Court’s holding in China Trade & Development Corp. v.

(i) shall have exclusive jurisdiction of such debtor and its

property wherever located (including property located outside the territorial limits of such court…)


16

M.V. Choong Yong, 837 F.2d 33 (2d Cir. 1987), which identified factors to

determine whether a foreign anti-suit injunction is appropriate. As a threshold

matter, under the China Trade test, the parties must be the same in both matters

and resolution of the case before the enjoining court must be dispositive of the

action to be enjoined. Id. at 35. If these factors are satisfied, a court may issue an

anti-suit injunction if any of the following factors are met:

(1) Frustration of a policy in the enjoining forum;

(2) The foreign action would be vexatious;

(3) A threat to the issuing court’s in rem or quasi in rem jurisdiction;

(4) The proceedings in the other forum prejudice other equitable considerations; or

(5) Adjudication of the same issues in separate actions would result in delay, inconvenience, expense, inconsistency, or a race to judgment.

Id.

In the case at hand, the preliminary China Trade factors have been met: the

parties are the same in both actions and resolution of the suit pending against

Maxam Limited in the Bankruptcy Court will be dispositive of the Cayman Action.

See, e.g., Bankruptcy Court Order, at A-593, District Court Order, 474 B.R. at 86-

87. The anti-suit injunction is proper, however, because resolution of the Cayman

Action would satisfy all of the factors set forth in China Trade.


17

First, allowing the Cayman Action to proceed would frustrate the policy of

SIPA. As the District Court stated, “SIPA serves dual purposes: to protect

investors, and to protect the securities market as a whole.” 474 B.R. at 87, quoting

In re Bernard L. Madoff Investment Securities LLC, 654 F.3d 229, 235 (2d Cir.

2011). SIPA’s efficacy depends critically on the presiding court’s power to

marshal “customer property” and to return it to customers. The “customer”

protection provisions of SIPA lie at the heart of the statute, and are the principal

expression of Congress’s intent to create in SIPA a unique liquidation scheme

applicable exclusively to securities broker-dealers. These provisions create a

special class of claimants - “customers” - and accord to members of that class

relief not available to other claimants. See, e.g., In re Bernard L. Madoff

Investment Secs. LLC, 424 B.R. 122, 133 (Bankr. S.D.N.Y. 2010), aff’d, 654 F.3d

229 (2d Cir. 2011), cert. dismissed, 132 S. Ct. 2712 (2012), and cert. den., 133

S.Ct. 24 and 133 S.Ct. 25 (June 25, 2012). In particular, in a SIPA liquidation,

“customers” have priority in the distribution of “customer property,” a fund of

assets generally consisting of the cash and securities “received, acquired or held”

by the debtor for its “customers” in the ordinary course of its business, along with

the proceeds of any such property transferred by the debtor. See SIPA §§ 78fff-

2(b) and (c)(1), 78lll(4). “Customers” generally share ratably in this fund to the


18

extent of their “net equity” and do so on a priority basis, to the exclusion of general

creditors.7 See SIPA § 78fff-2(b) and (c)(1).

Consistent with Congress’s emphasis in SIPA on the priority treatment of

customers, Congress included in SIPA several provisions designed to maximize the

fund of customer property available for distribution to customers. For instance,

Congress defined “customer property” expansively to include, inter alia, any

property of the debtor “which, upon compliance with applicable laws, rules, and

regulations, would have been set aside or held for the benefit of customers,”

regardless of whether such property was, in fact, set aside and so held. See SIPA §

78lll(4)(D) (2008). Moreover, Congress significantly enhanced the power of a

SIPA trustee to use the avoidance provisions of the Bankruptcy Code to recover

customer property, providing that, for purposes of those provisions, “the trustee

may recover any property transferred by the debtor which, except for such transfer,

7 To the extent that the fund of “customer property” is insufficient to satisfy the “net equity” claims of “customers” in full, SIPA mandates that SIPC provide additional relief by making limited advances to the SIPA trustee for this purpose from the SIPC Fund. SIPA § 78fff-3(a). See also SEC v. Packer, Wilbur & Co., 498 F.2d 978, 983, 985 (2d Cir. 1974). In this regard, SIPC may advance to the SIPA trustee not more than $500,000 per customer, of which no more than $100,000 (now $250,000 per a Congressional amendment not applicable to this case) may be used to satisfy that portion of a claim which is for cash rather than for securities. See SIPA § 78fff-3(a). Thus, each “customer” with a valid claim is assured of satisfaction within the limits indicated, relief not available to general creditors. Id.; In re A.R. Baron & Co., 226 B.R. 790, 795 (Bankr. S.D.N.Y. 1998).


19

would have been customer property... [and] the property so transferred shall be

deemed to have been the property of the debtor.”8 See SIPA § 78fff-2(c)(3)

(emphasis added). The language of this provision suggests that, whether or not

property sought by a SIPA trustee in an avoidance or recovery action actually

qualifies as property of the debtor’s estate, Congress intended that such property be

treated as such for purposes of the action.

Here, the Trustee’s action against Maxam Limited is seeking just that – to

recover customer property for distribution to customers, in accordance with SIPA

and the Bankruptcy Code. The Cayman Action, on the other hand, is an attempt to

adjudicate the Trustee’s action outside of the purview of SIPA.

Second, the Cayman Action is a threat to the Bankruptcy Court’s in rem

jurisdiction. Both SIPA and the Bankruptcy Code grant in rem jurisdiction to the

8 SIPA Section 78fff-2(c)(3) provides:

Whenever customer property is not sufficient to pay in full the claims set forth in subparagraphs (A) through (D) of paragraph (1), the trustee may recover any property transferred by the debtor which, except for such transfer, would have been customer property if and to the extent that such transfer is voidable or void under the provisions of title 11. Such recovered property shall be treated as customer property. For purposes of such recovery, the property so transferred shall be deemed to have been the property of the debtor and, if such transfer was made to a customer or for his benefit, such customer shall be deemed to have been a creditor, the laws of any State to the contrary notwithstanding.


20

Bankruptcy Court over “property of the debtor” and “property of the estate.” See

SIPA § 78eee(b)(2)(A); Bankruptcy Code § 541(a)(1). Because the suit by the

Trustee is property of the estate, and the Cayman Action is an attempt to

circumvent the Trustee’s action, the Cayman Action is a clear threat to the

Bankruptcy Court’s in rem jurisdiction. See Bankruptcy Court Order at A-593.

Moreover, even if a suit against the Trustee were not in violation of stays, as it is

and as discussed above, SIPA vests exclusive jurisdiction over such suits in the

bankruptcy court. See SIPA §§78eee(b)(2)(A)(ii). Thus, the Cayman action poses

a threat to the Bankruptcy Court’s jurisdiction in this regard as well.

Third, the vexatiousness, delay, expense, and race to judgment as a result of

the Cayman Action are self-evident. The Cayman Action essentially asks a foreign

court to decide the action pending in the Bankruptcy Court. If allowed to continue,

the Cayman Action would cause the Trustee an undue expense and burden of

maintaining two separate litigations, when the first court to judgment would bind

the other court, at least according to the winning party. As the District Court

stated, “it is difficult to imagine why Maxam Limited would have brought the

Cayman Action except to seek a more favorable result than it could secure in the

Bankruptcy Court.” 474 B.R. at 87. Meanwhile, as noted by the Bankruptcy

Court, the Trustee’s action against the other Maxam defendants would continue in

the Bankruptcy Court. See A-593-94. As such, this Cayman Action is precisely


21

the type of foreign suit that should be enjoined under SIPA, the Bankruptcy Code,

and China Trade.


22

CONCLUSION

For all of the foregoing reasons, this Court should affirm the Order of the

District Court.

Dated: December 11, 2012 Washington, D. C.

Respectfully submitted,

/s/ Josephine Wang JOSEPHINE WANG

General Counsel KEVIN H. BELL Senior Associate General Counsel for Dispute Resolution LAUREN T. ATTARD Assistant General Counsel SECURITIES INVESTOR PROTECTION CORPORATION 805 Fifteenth Street, N.W., Suite 800 Washington, D.C. 20005 Telephone: (202) 371-8300 Facsimile: (202) 371-6728 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]


CERTIFICATE OF COMPLIANCE WITH RULE 32(a)

This brief complies with Fed. R. App. P. 32(a)(7)(B) because the brief

contains 4,877 words, excluding the parts exempted by Fed. R. App. P.

32(a)(7)(B)(iii).

This brief complies with the typeface requirements of Fed. R. App. P.

32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because this

brief has been prepared in a proportionately spaced typeface using Microsoft Word

in 14-point Times New Roman font.

Dated: Washington, D.C. December 11, 2012 Respectfully submitted, SECURITIES INVESTOR PROTECTION CORPORATION /s/ Lauren T. Attard Lauren T. Attard Assistant General Counsel 805 15th Street, N.W., Suite 800 Washington, D.C. 20005 Telephone: (202) 371-8300


UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT In re: BERNARD L. MADOFF, Debtor. Maxam ABSOLUTE RETURN FUND LIMITED,

Defendant-Appellant, v. Docket No. 12-2194-bk

IRVING H. PICARD, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC,

Plaintiff-Appellee.

I, Lauren T. Attard, hereby certify that on December 11, 2012, I caused

true and correct copies of the foregoing Brief of Intervenor Securities

Investor Protection Corporation to be served upon those parties who receive

electronic service through ECF in the within appeal.

/s/ Lauren T. Attard Lauren T. Attard


Documents

Picard v. Maxam - 2d Cir. - SIPC Brief - MadoffTrustee€¦ · United States Court of Appeals ... the China Trade Test Cannot Be Met Here ... Hong Kong & Shanghai Banking Corp., Ltd