Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC

634 B.R. 39

SECURITIES INVESTOR PROTECTION CORP., Plaintiff–Applicant,

v.BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant.

In re: Bernard L. Madoff, Debtor.

Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff, Plaintiff,

v.The Gerald and Barbara Keller Family Trust, Gerald E. Keller, individually and in his capacity as Trustee of the Gerald and Barbara Keller Family Trust, Barbara Keller, individually and in her capacity as Trustee of the Gerald and Barbara Keller Family Trust, Defendants.

Case No. 08-01789 (CGM) (Substantively Consolidated)

Case No. 10-04539 (CGM)

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

Signed September 30, 2021

MARIE L. CARLISLE, NICHOLAS J. CREMONA, Baker & Hostetler LLP, 45 Rockefeller Plaza, New York, NY 10111, Attorneys for Irving H. Picard, Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC and Bernard L. Madoff.

HELEN DAVIS CHAITMAN, Chaitman LLP, 465 Park Avenue, New York, NY 10022, Attorney for Defendants.

SIPA LIQUIDATION

MEMORANDUM DECISION GRANTING SIPA TRUSTEE'S MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANTS’ CROSS MOTION FOR SUMMARY JUDGMENT

CECELIA G. MORRIS, CHIEF UNITED STATES BANKRUPTCY JUDGE

Irving H. Picard ("SIPA Trustee"), Trustee for the Substantively Consolidated SIPA Liquidation of Bernard L. Madoff Investment Securities LLC ("BLMIS") and Bernard L. Madoff ("Madoff"), brought this adversary proceeding to avoid and recover fictitious profits received by the Gerald and Barbara Family Trust ("Family Trust") and Gerald and Barbara Keller, in their capacities as trustees of the Gerald and Barbara Family Trust (collectively, "Defendants"),¹ on account of their investment in BLMIS's Ponzi scheme. The parties have filed cross motions for summary judgment. For the reasons that follow, the Court dismisses the Family Trust as a defendant, grants the SIPA Trustee's motion, and denies the Defendants’ motion.

Jurisdiction

This Court has jurisdiction over these adversary proceedings pursuant to 28 U.S.C. §§ 1334(b) and 157(a), the District Court's Standing Order of Reference dated July 10, 1984, and the Amended Standing Order of Reference dated January 31, 2012. In addition, the District Court removed the SIPA² liquidation to this Court pursuant to SIPA § 78eee(b)(4), see Order, Civ. 08-01789 (Bankr. S.D.N.Y. Dec. 15, 2008), at ¶ IX, ECF No. 1, and this Court has jurisdiction under the latter provision. As the district court case has been dismissed and the reference has not been withdrawn, the Court has authority to enter a final order in these cases. To the extent that it does not, the Court asks the District Court to construe this decision as proposed findings of fact and conclusions of law, pursuant to the Amended Standing Order of Reference dated January 31, 2012.

Background

For background of these SIPA cases and the BLMIS Ponzi scheme, please refer to the findings of fact in Picard v. Nelson (In re BLMIS) , 610 B.R. 197, 206–14 (Bankr. S.D.N.Y. 2019). Unless discussed below, the relevant facts noted are not in dispute here.

Undisputed Facts

At all relevant times, Gerald and Barbara Keller were residents of Great Neck, New York and Rancho Mirage, California. Answer ¶ 8, ECF No. 40. In 1998, they created the Family Trust under California law and have served as its trustees. Id. at ¶ 7–8; Chaitman Decl., Ex. AD, ECF No. 115. In 1997, Gerald Keller opened Account No. 1ZB3143 ("Family Trust BLMIS Account") with Madoff's Investment Advisory Business ("IA Business") in his own name with an initial investment of $1,000,000. Greenblatt Decl., Attach. B., Ex. 4, ECF No. 105; Keller Decl., Ex. 1, ECF No. 114. In 1999, Gerald Keller renamed the account "Gerald E. Keller, Trustee The Gerald and Barbara Keller Family Trust U/A June 2, 1998" and then "Gerald E. Keller (Gerald E. Keller Separate Property) The Gerald and Barbara Keller Family Trust U/A June 2, 1998." Id ., Ex. 4. Additional investments into the Family Trust BLMIS Account totaling $1,898,852 were made on January 4, 1999 and August 24, 2006. Greenblatt Decl., Attach B., Ex. 4, ECF No. 105.

At least the latter two deposits were made into a specific JP Morgan Chase bank account ending in 703 ("703 Account"). Collura Decl., Attach. A ¶ 20–24, ECF No. 103; id. Attach. B, Ex. 6. Expert analysis shows that money in the 703 Account was then transferred to another JP Morgan Chase bank account ending in 509 ("509 Account"), from which payments were made to BLMIS's customers. Id. , Attach. A, ¶ 25–27.

During the two-year period prior to the initiation of this SIPA case on December 11, 2008 ("Two-Year Period"), there were thirteen withdrawals from the Family Trust BLMIS Account totaling $2,125,000. Greenblatt Decl., Attach B, Ex. 4, ECF No. 105. Prior to the Two-Year Period, $2,670,000 had been withdrawn from the Family Trust BLMIS Account, meaning that the account had a positive balance of $228,852 at the start of the Two-Year Period. See id. The $2,125,000 withdrawn during the Two-Year Period thus represents withdrawals of $1,896,148 in excess of principal deposited with Madoff and BLMIS. See id.

All withdrawal checks came from the 509 Account and were issued to "Gerald E Keller Tstee." Keller Decl., Ex. 5, ECF No. 114. Either Gerald Keller himself or Marianne Jannace (with Gerald Keller's authorization) would endorse the checks with Gerald Keller's signature and deposit the funds into accounts for Keller International Publishing, LLC and Keller International Publishing Corp. (together, "Keller Publishing"). Id. ; Keller Decl., ¶ 10, ECF No. 114; Collura Decl. Attach. B, Ex. 5, ECF No. 103.

The SIPA Trustee filed this adversary proceeding on December 1, 2010. Complaint, ECF No. 1. After the claims against Gerald and Barbara Keller in their individual capacities were dismissed, Order, ECF No. 39, the Defendants answered the Complaint on September 17, 2015. Answer, ECF No. 40. The SIPA Trustee filed his motion for summary judgment on July 22, 2021 (ECF No. 99 ) seeking judgment on Count One of the Complaint.³ The Defendants filed their cross motion for summary judgment on August 17, 2021 (ECF No. 110 ). After replies were filed by both sides (ECF Nos. 119 and 124) and the Securities Investor Protection Corporation (ECF No. 122 ), the Court heard oral argument on September 15, 2021.

Discussion

Under Rule 56(a) of the Federal Rules of Civil Procedure, as applied by Rule 7056(c) of the Federal Rules of Bankruptcy Procedure: "The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." The materiality of facts must be determined with reference to the governing substantive law. Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). "A fact is material only if it affects the result of the proceeding and a fact is in dispute only when the opposing party submits evidence such that a trial would be required to resolve the differences." In re CIS Corp. , 214 B.R. 108, 118 (Bankr. S.D.N.Y. 1997).

A movant has the initial burden of establishing the absence of any genuine issue of material fact. Celotex Corp. v. Catrett , 477 U.S. 317, 322–23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A moving party may obtain summary judgment by showing that little or no evidence may be found in support of the nonmoving party's case. Gallo v. Prudential Residential Servs. Ltd. P'ship , 22 F.3d 1219, 1223–24 (2d Cir.1994). The nonmoving party "must do more than simply show that there is some metaphysical doubt as to material facts." Repp v. Webber , 132 F.3d 882, 889 (2d Cir. 1997). The nonmoving party should oppose the motion for summary judgment with evidence that is admissible at trial. See Fed. R. Civ. P. 56(e)(1); Crawford v. Dep't of Investigation , 324 F. App'x 139, 143 (2d Cir. 2009) (affirming award of summary judgment in favor of defendant, where plaintiff presented testimony from uncorroborated source, as well as "speculation, hearsay and other inadmissible rumor, and conclusory allegations"). "If there are cross-motions for summary judgment, the Court must assess each of the motions and determine whether either party is entitled to judgment as a matter of law." Dish Network Corp. v. Ace Am. Ins. Co. , 431 F. Supp. 3d 415, 421 (S.D.N.Y. 2019) (cleaned up). "The court must evaluate each party's motion on its own merits, taking care in each instance to draw all reasonable inferences against the party whose motion is under consideration." Heublein, Inc. v. United States , 996 F.2d 1455, 1461 (2d Cir. 1993) (cleaned up).

I. The SIPA Trustee Satisfies 11 U.S.C. § 548(a)(1)(A)

The SIPA Trustee seeks to avoid and recover transfers of fictitious profits to the Defendants under 11 U.S.C. § 548(a)(1)(A). The elements of this claim are: (i) a transfer of an interest of the debtor in property (ii) made within two years of the petition date (iii) with "actual intent to hinder, delay, or defraud" a creditor. Adelphia Recovery Tr. v. Bank of Am., N.A. , 2011 WL 1419617, at *2 (S.D.N.Y. Apr. 7, 2011), aff'd 748 F.3d 110 (2d Cir. 2014). SIPA § 78fff-2(c)(3) allows the SIPA Trustee to "invoke the fraudulent transfer provisions in the Bankruptcy Code to recover customer property." Picard v. Gettinger (In re BLMIS) , 976 F.3d 184, 199 (2d Cir. 2020).

a. Transfer of an Interest of the Debtor in Property

The Defendants cite Picard v. Avellino (In re BLMIS) , 557 B.R. 89 (Bankr. S.D.N.Y. 2016), arguing that the SIPA Trustee cannot recover from the Defendants, as the IA Business was run by Madoff and that Avellino is binding on the SIPA Trustee. The Defendants’ argument is misplaced. Avellino does not firmly establish when the IA Business became part of BLMIS. Instead, it holds that the SIPA Trustee may not recover transfers made by Madoff prior to January 1, 2001, when the IA...