In re Bernard L. Madoff Inv. Sec. LLC

440 B.R. 282

In re BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Debtor.Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff,

v.Stanley Chais, et al., Defendants.

Bankruptcy No. 08-01789 (BRL).

Adversary No. 09-1172 (BRL).

United States Bankruptcy Court, S.D. New York.

Nov. 30, 2010.

Baker & Hostetler LLP, New York, NY, by David J. Sheehan, Marc E. Hirschfield, Paul P. Eyre (admitted pro hac vice), Ona T. Wang, Karl Fanter (admitted pro hac vice), for Plaintiff, Irving H. Picard, Esq., Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff.

Loeb & Loeb LLP, New York, NY, by Eugene Licker, Walter H. Curchack, Amanda Merkur, for Defendants Stanley Chais, Pamela Chais, Appleby Productions Ltd., Appleby Productions Ltd. Defined Contribution Plan, Appleby Productions Ltd. Money Purchase Plan, Appleby Productions Ltd. Profit Sharing Plan, and the 1991 Chais Family Trust.

MEMORANDUM DECISION AND ORDER GRANTING TRUSTEE'S MOTION TO DISMISS DEFENDANTS' COUNTERCLAIMS

BURTON R. LIFLAND, Bankruptcy Judge.

Before the Court is the motion to dismiss (the "Motion to Dismiss") of plaintiff Irving H. Picard, Esq. (the "Trustee" or "Picard"), trustee for the substantively consolidated Securities Investor Protection Act ¹ ("SIPA") liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS") and Bernard L. Madoff ("Madoff") seeking to dismiss the counterclaims filed by defendants Stanley Chais, Pamela Chais, Appleby Productions Ltd., Appleby Productions Ltd. Defined Contribution Plan, Appleby Productions Ltd. Money Purchase Plan, Appleby Productions Ltd. Profit Sharing Plan, and the 1991 Chais Family Trust (collectively, the "Answering Defendants") in the above-captioned adversary proceeding.

The Answering Defendants assert four counterclaims (the "Counterclaims") ² against the Trustee, all of which are based on a notice letter (the "Letter") that the Trustee sent to Goldman Sachs ("Goldman") on March 6, 2009: (1) tortious interference with a contract; (2) tortious interference with a business relationship; (3) conversion; and (4) a Fifth Amendment violation. The Trustee asserts that the Counterclaims fail to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure ("Rule") 12(b)(6), made applicable herein by Federal Rule of Bankruptcy Procedure ("Bankruptcy Rule") 7012, and should be dismissed. For the reasons set forth below and at oral argument, the Trustee's Motion to Dismiss is GRANTED.

BACKGROUND

I. The Trustee's Complaint Against the Defendants

On May 1, 2009, the Trustee filed a complaint (the "Complaint") against theAnswering Defendants and others (collectively, the "Defendants"), ³ seeking to avoid and recover preferential payments and fraudulent transfers of over $1 billion in connection with the infamous Madoff Ponzi scheme. For a detailed background of the mechanics of the Ponzi scheme and the events preceding the Trustee's Complaint, see Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Bernard L. Madoff Inv. Sec. LLC), 424 B.R. 122, 125-33 (Bankr.S.D.N.Y.2010).

II. The Answering Defendants' Counterclaims Against the Trustee

On November 12, 2009, the Answering Defendants answered the Complaint and filed their Counterclaims. In addition to damages, the Answering Defendants seek "an order by the Court declaring that the Letter should be withdrawn and that the contents of the Account are not customer property or property of the estate and enjoining the Trustee from sending out similar letters in the future." Answer, p. 27.

The following facts alleged in the Counterclaims, presented in the light most favorable to the Answering Defendants, are assumed to be true for purposes of this Motion to Dismiss. In 2002, Stanley Chais, acting as co-trustee of the 1991 Chais Family Trust, opened an account at Goldman (the "Account"). The Account was the "principal and only materially liquid asset of Mr. and Mrs. Chais other than the accounts they held with Madoff." Answer, ¶ 180. In March 2009, approximately three months after the collapse of Madoff's Ponzi scheme, Goldman notified Stanley and Pamela Chais that they would not be permitted to withdraw any funds from the Account. Initially, Goldman ignored Stanley and Pamela Chais' inquiries as to why their account was frozen. Goldman later claimed that the freeze was the result of the Chaises' failure to honor capital calls on some of the Account's investments. Finally, Goldman admitted that the freeze was a result of the Letter it received from the Trustee, prohibiting Goldman from disbursing any funds currently in the Account.

a. The Trustee's March 6, 2009 Notice Letter to Goldman

On March 6, 2009, the Trustee sent the notice Letter to Goldman stating that "[Goldman] may have received funds, either directly or indirectly, from BLMIS during the 90-day period prior to the Filing Date (the "Funds")" constituting "customer property" as defined under SIPA section 78 lll(4). See Answer, Exhibit A (attaching the letter), at p. 1 [hereinafter, the "Letter"]. The Letter explains that "customer property" means "cash and securities ... at any time received, acquired or held by or for the account of [BLMIS] or for the securities accounts of a customer, and the proceeds of any such property transferred by [BLMIS], including property unlawfully converted." Id. (quoting SIPA § 78 lll(4)).

After providing legal authority for SIPA's definition of "customer property," the Letter puts Goldman on notice that any further disbursements of Funds will constitute a willful violation of the Bankruptcy Court's automatic stay:

This letter places you on notice (if you were not already on notice) that because the Funds constitute "customer property" and, therefore, property of BLMIS pursuant to SIPA, the Trustee will presumethat any further payment or disposition of the Funds by you (whether or not at the direction of your customer or depositor) will be deemed a willful violation of the automatic stay by the Bankruptcy Court.

Id. at 2. The Letter therefore instructs Goldman "to refrain from engaging in or permitting any transfers or dispositions of the Funds and other monies received from BLMIS without an order from the Bankruptcy Court." Id.

Finally, the Trustee warns Goldman that "failure to abide by this instruction may subject [Goldman] to liability under 11 U.S.C. §§ 549 and 550." Id. The Trustee adds that "any such transfer or disposition may be deemed by the Bankruptcy Court to have been made in bad faith" and Goldman's liability "may include sanctions." Id. It is noteworthy that the two-page letter never mentions the Answering Defendants.

The Answering Defendants assert that the contents of the Letter are "patently untrue" and that the "scant legal authority cited is entirely misrepresented." Answer, ¶ 186. They continue that the "Trustee does not have the power to control Mr. and Mrs. Chais' assets and such assets are not a part of the Madoff estate." Id. Finally, they allege that Goldman "felt threatened by the Letter" and therefore "effectuated a freeze over the Account—only allowing disbursements that were approved and directed by the Trustee." Id., ¶ 187. The freeze remains in effect pursuant to a consent order, as explained below.

b. The Order to Show Cause and The Consent Order Freezing Assets

The Answering Defendants allege that at the outset, the Trustee refused to share the Letter or its contents with Mr. and Mrs. Chais. Only after Mr. and Mrs. Chais filed a related Order to Show Cause did the Trustee finally disclose the Letter to them.

On September 29, 2009, the Answering Defendants moved the Court by an order to show cause seeking a declaration that the money in the Account was wrongfully frozen. Dkt. No. 17. On October 1, 2009, the Trustee opposed the Answering Defendants' motion and filed an application for a temporary restraining order and preliminary injunction prohibiting the Answering Defendants from transferring or otherwise dissipating "any of the funds in their banking and investment accounts located in the custody of Goldman Sachs, City National Bank, or elsewhere...." Dkt. No. 22, p. 1. That same day, the Court held a chambers conference on the matter and entered an order to show cause with a temporary restraining order enjoining the Answering Defendants from "transferring or otherwise of disposing [sic] any of their assets or assets of entities they control prior to the hearing on Plaintiff's Application for a Temporary Restraining Order" and permitting the Answering Defendants to withdraw up to $50,000 from their accounts (the "October 1, 2009 Order"). Dkt. No. 23, p. 2. The temporary restraining order was subsequently extended, upon consent of the parties, on October 7, 2009,⁴ October 20, 2009,⁵ and October 29, 2009.⁶ Dkt. Nos. 28, 29, 32, respectively.

On November 2, 2009, the Answering Defendants entered into a consent order with the Trustee, freezing various assets belonging to the Answering Defendants, including the Goldman Account. Dkt. No. 33. The consent order also allowed the Answering Defendants to withdraw money from those accounts for legal, medical and living expenses, in addition to other expenses such as capital calls. Id. Based on the Answering Defendants' representation of need, the Trustee approved the release of over $450,000 from the Account at Goldman. Declaration of Paul P. Eyre in Support of Application for a Temporary Restraining Order and Preliminary Injunction (Dkt. No. 21), ¶ 12.

On May 5, 2010, the Court heard oral argument regarding, inter alia, the Answering Defendants' Counterclaims.

MOTION TO DISMISS UNDER RULE 12(b)(6)

Rule 12(b)(6), made applicable to this proceeding by Bankruptcy Rule 7012, allows a party to move to dismiss a cause of action for "failure to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). ⁷ When considering a motion to dismiss...