cleary gottlieb steen & hamilton llp lawrence b. … · case 1:11-cv-07810-ua document 2 filed...

CLEARY GOTTLIEB STEEN & HAMILTON LLPLawrence B. FriedmanBreon S. PeaceOne Liberty PlazaNew York, New York 10006Attorneys for BNP Paribas Arbitrage, SNC

UNITED STATES BANKRUPTCY COURTSOUTHERN DISTRICT OF NEW YORK--------------------------------------------------- x

SECURITIES INVESTOR PROTECTION CORPORATION,: Adv. Pro. No. 08-0 1789 (BRL)

Plaintiff-Applicant,

V. SIPA Liquidation

BERNARD L. MADOFFINVESTMENT SECURITIES LLC,

Defendant. (Substantively Consolidated)

---------------------------------------------------- x

IRVING H. PICARD, Trustee for the Liquidation of Av r.N.1-45 BLBernard L. Madoff Investment Securities LLC, Av r.N.1-45 BL

Plaintiff,

v.. ORAL ARGUMENTREQUESTED

EQUITY TRADING PORTFOLIO LIMITED, EQUITYTRADING FUND, LTD., BNP PARIBAS ARBITRAGE,SNC,

Defendants.

---------------------------------------------------- x

MEMORANDUM OF LAW IN SUPPORT OF BNP PARIBAS ARBITRAGE, SNC'SMOTION FOR AN ORDER WITHDRAWING THE REFERENCE

Case 1:11-cv-07810-UA Document 2 Filed 11/01/11 of 24

TABLE OF CONTENTS

TABLE OF AUTHORITIES............................................................................1i

PRELIMINARY STATEMENT ....................................................................... 1.

BACKGROUND .......................................................................................... 5

ARGUMENT ........................................................................................... 6

POINT 1: THE APPLICATION OF SECTION 546(e) OF THEBANKRUPTCY CODE IN THE CONTEXT OF THIS SIPCPROCEEDING RAISES SUBSTANTIAL ISSUES OFNON-BANKRUPTCY FEDERAL LAW ..................................... 8

POINT 11: ISSUES CONCERNING THE BANKRUPTCY COURT'SJURISDICTION UNDER STERN V. MARSHALL RAISESUBSTANTIAL ISSUES OF NON-BANKRUPTCY FEDERALLAW ............................................................................. I1

POINT III:

POINT IV:

POINT V:

WHETHER THE TRUSTEE HAS STANDING TO ASSERTCOMMON LAW CLAIMS RAISES SUBSTANTIAL ISSUES OFNON-BANKRUPTCY FEDERAL LAW .................................... 12

WHETHER THE TRUSTEE'S COMMON LAW CLAIMS AREPREEMPTED BY SLUSA RAISES SUBSTANTIAL ISSUES OFNON-BANKRUPTCY FEDERAL LAW .................................... 14

WHETHER SIPA APPLIES EXTRATERRITORIALLY RAISESSUBSTANTIAL ISSUES OF NON-BANKRUPTCY FEDERALLAW .............................................................................. 17

CONCLUSION ........................................................................................... 19


TABLE OF AUTHORITIES

Page(s)CASES

AT&T Co. v. Chateaugay Corp.,88 B.R. 581 (S.D.N.Y. 1988) ............................................................................. 7

Backus v. Conn. Cmtjy. Bank, N.A.,No. 09-1256 (PCD), 2009 WL 5184360 (D. Conn. Dec. 23, 2009).................................... 17

Barclay v. Swiss Fin. Corn. (In re Estate of Midland Euro Exch. Inc.),347 B.R. 708 (Bankr. C.D. Cal. 2006).................................................................. 18

Barron v. ligolnikov,No. 09-4471 (TPG), 2010 WL 882890 (S.D.N.Y. Mar. 10, 2010)................................... 17

Bear. Steams Sec. Corp. v. Gredd,No. 01 CIV. 4379 (NRB), 2001 WL 840187 (S.D.N.Y. July 25, 200 1) ................. 7-8, 12, 18

City of New York v. Exxon Corp.,932 F.2d 1020 (2d Cir. 1991) ............................................................................. 7

Granfinanciera v. Nordberg,492 U.S. 33 (1989)...................................................................................11..I

Holmes v. Sec. Investor Prot. Corp.,503 U.S. 258 (1992).................................................................................... 14

In re Beacon Assocs. Litig.,745 F. Supp. 2d 3 86 (S.D.N.Y. 2010), reconsideration denied (Dec. 7, 20 10)....................... 17

In re Blixseth,No. 09-6045207, 2011 WL 3274042 (Bankr. D. Mont. Aug. 1, 2011).............................. 12

In re Dana Colp.,379 B.R. 449 (S.D.N.Y. 2007) .......................................................................... 10

In re Enron Creditors Recovery Corp.,651 F.3d 329 (2d Cir. 2011)............................................................................... 9

In re J.P. Jeanneret Assocs., Inc.,769 F. Supp. 2d 340 (S.D.N.Y. 2011)..................................................................... 17


In re Kingate Mgmt. Ltd. Litig.,No. 09-5386 (DAB), 2011 WL 1362106 (S.D.N.Y. Mar. 30, 2011) ........................... 15,16

In re Merkin,No. 08-10922 (DAB), 2011 WL 4435873 (S.D.N.Y. Sept. 23, 2011) ................................. 17

Kirschner v. KPMG LLP,93 8 N.E.2d 941 (2010) .................................................................................. 13

Levinson v. PSCC Serv., Inc.,No. 09-00269 (PCD), 2009 WL 51843 63 (D. Conn. Dec. 23, 2009).................................. 17

Maxwell Commc'n Corp. PLC v. Societe Gen. PLC (In re Maxwell Commc'n CorpPLC0,

186 B.R. 807 (S.D.N.Y. 1995) .......................................................................... 18

Mishkin v. Ageloff,220 B.R. 784 (S.D.N.Y. 1998)............................................................................ 7

Morrison v. Nat'l Austi. Bank Ltd.,130 S. Ct. 2869 (2010) ............................................................................... 4, 17

Newman v. Family Mgmt. Corp.,748 F. Supp. 2d 299 (S.D.N.Y. 2010)..................................................................... 17

Northwest Airlines, Inc. v. Los Angeles (In re Northwest Airlines Corp.),384 B.R. 51, 56 (S.D.N.Y. 2008).......................................................................... 12

Official Comm. of Unsecured Creditors of Ouebecor World (USA) Inc. v. Am. UnitedLife Ins. Co. (In re Quebecor World (USA) Inc.),

453 B.R. 201 (Bankr. S.D.N.Y. 2011) ................................................................... 9

Picard v. HSBC Bank PLC,450 B.R. 406 (S.D.N.Y. 2011) ("HSBC I') ...................................................... passim

Picard v. HSBC Bank PLC,454 B.R. 25 (S.D.N.Y. 2011) ("HSBC 11")..................................................... 6, 13, 14

Picard v. JPMornan Chase & Co.,No. 11 -0913, 2011 WL 2119720 (S.D.N.Y. May 23, 2011).................................... passim

Picard v. Katz,No. 11 -3605 (JSR) 2011 WL 4448638 (S.D.N.Y. Sept. 27, 2011)......................... 6, 8-9, 10

Redington v. Touche Ross & Co.,592 F.2d 617 (2d Cir. 1978), rev'd on other grounds, 442 U.S. 560 (1979) ....................... 14


Ring v. AXA Fin., Inc.,483 F.3d 95 (2d Cir. 2007)........................................................................... 14-15

Shearson Lehman Hutton, Inc. v. Wagoner,944 F.2d 114 (2d Cir. 1991) ............................................................................. 13

Shugrue v. Air Line Pilots Ass'n Int'l (In re Ionosphere Clubs, Inc.),922 F.2d 984 (2d Cir. 1990)............................................................................... 7

Stem v. Marshall,131 S. Ct. 2594 (2011)............................................................................ 3,11,12

Touche Ross & Co. v. Redington,442 U.S. 560 (1979).................................................................................... 14

Wolf Living Trust v. FM Multi-Strategy Inv. Fund, LP,No. 09-1540 (LBS), 2010 WL 4457322 (S.D.N.Y. Nov. 2, 2010)..................................... 17

STATUTES

11. U.S.C. § 78bb......................................................................................... 15

11 U.S.C. § 546(e)...................................................................................... 9

11 U.S.C. § 550 ........................................................................................ 9-10

28 U.S.C. § 157(d)............................................................................... 2,6-7, 18


Defendant BNP Paribas Arbitrage SNC, ("BNPP Arbitrage"), submits this

memorandum of law in support of its motion for an order pursuant to 28 U.S.C. § 157(d) and

Rule 5011 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules") withdrawing

the reference of the above-captioned action to the United States Bankruptcy Court for the

Southern District of New York (the "Bankruptcy Court").'

PRELIMINARY STATEMENT

In this action, the liquidating trustee (the "Trustee") of Bernard L. Madoff

Investment Securities LLC ("BLMIS") seeks to avoid millions of dollars in alleged transfers

purportedly (and improperly) on behalf of BLMIS's customers.

The Trustee asserts against BNPP Arbitrage, which lost more than $ 100 million in

connection with its investment in Equity Trading Portfolio and thus received no alleged fictitious

profits, (1) claims under the Bankruptcy Code and New York Debtor and Creditor Law

("NYDCL") seeking to avoid the alleged subsequent transfer in the 90 days leading up to

BLMIS's insolvency, and (2) a common law claim that does not belong to him or the BLMIS

estate, and which the Trustee has no standing to bring. These claims are based on the Trustee's

allegation that BNPP Arbitrage received a transfer from defendant Equity Trading Portfolio

Limited ("Equity Trading") that Equity Trading in turn received from BLMIS. Withdrawal of

the reference of this action is mandatory because resolution of these claims will require

significant interpretation of non-bankruptcy federal law, which must be determined by an Article

1 BNPP Arbitrage does not concede the accuracy of the Trustee's allegations in the Complaint. It will

respond to the substance of the Trustee's allegations at the appropriate time, and makes this motion withoutprejudice to or waiver of any rights or defenses, including without limitation any defenses based on the lack ofjurisdiction of the District Court or the Bankruptcy Court. Unless otherwise indicated, capitalized terms have themeaning assigned to them in the Complaint.


III court. In particular, all of the Trustee's claims-the two claims brought under the Bankruptcy

Code and the single common law claim-raise several novel and important questions requiring

the interpretation of at least SIPA, federal, and constitutional law regarding subject matter

jurisdiction and the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"). Congress

has mandated that issues requiring the interpretation of non-bankruptcy federal law must be

determined in the first instance by an Article III court. Accordingly, where, as here, a case

requires the interpretation of non-bankruptcy federal law, the reference to the Bankruptcy Court

must be withdrawn. See 28 U.S.C. § 157(d).

First, as Judge Rakoff has ruled, the Trustee's purported claims under the

Bankruptcy Code raise significant and novel issues under the federal securities laws.

Specifically, the Trustee contends that SIPA, a non-bankruptcy law, permits him to invoke the

avoidance provisions of the Bankruptcy Code to avoid certain transfers from BLMIS to Equity

Trading, and then to recover one such transfer from BNPP Arbitrage, a subsequent transferee,

despite the "safe harbor" provided by Section 5 46(e) of the Bankruptcy Code that protects the

transfer from avoidance.

Judge Rakoff has already held in two nearly identical cases that consideration of

the very type of interaction between SIPA and Section 546(e) of the Bankruptcy Code that is at

issue here requires withdrawal of the reference. See Decl. of Jamie Rietema ("Rietema

Declaration" or "Rietema Decl.") Ex. B (Order, Picard v. Katz, et al., No. 11 -03 605 (JSR)

(S.D.N.Y. July 5, 2011) (Docket No. 19) (granting motion to withdraw the reference, in part,

based on the issue of whether the Section 546(e) safe harbor applies under SIPA)); see also

Rietema Decl. Ex. C (Order, Picard v. James Greiff, No. 11-3775 (JSR) (S.D.N.Y. Sept. 16,

2011) (Docket No. 19) (withdrawing the reference to address, among other issues, "whether 11


U.S.C. § 546(e) applies to [a SIPA] case, limiting the Trustee's ability to avoid transfers")).

Second, withdrawal of the reference is mandatory because the Bankruptcy Court

cannot determine the Trustee's claims against BNPP Arbitrage without substantial interpretation

of non-bankruptcy federal law concerning the Bankruptcy Court's subject matter jurisdiction and

constitutional authority under the Supreme Court's recent decision in Stern v. Marshall, 131 S.

Ct. 2594 (2011). Indeed, even if withdrawal was not mandatory, withdrawal of the reference on

a permissive basis would be appropriate in order to promote judicial efficiency, and to prevent

delay and cost to the parties given the unsettled nature of the Bankruptcy Court's jurisdiction.

Third, as Judge Rakoff has also previously ruled, the Trustee's common law claim

requires a court to consider the threshold issue of standing, which must be decided under the

federal securities laws. Specifically, a court will need to consider whether SIPA provides the

Trustee with standing to assert common law claims "on behalf of' the customers of BLMIS.

Notably, every court in this district to address withdrawal of the reference motions on this basis

has determined that withdrawal of the reference is required so that these issues may be properly

considered by a districtjudge. See~. Picard v. HSBC Bank PLC, 450 B.R. 406, 410, 413

(S.D.N.Y. Apr. 25, 2011) ("HSBC I") (withdrawing the reference on the issues of standing under

SIPA and SLUSA preemption); Rietema Decl. Ex. D (Order, Picard v. Maxam Absolute Return

Fund, L.P. et al., 11-3261 (JSR) (S.D.N.Y. July 15, 201 1) (Docket No. 21) ("Maxam Order")

(same) ); Picard v. JPMorgan Chase & Co., No. 11-0913, 2011 WL 2119720, at *4 (S.D.N.Y.

May 23, 2011) (interpretation of SIPA and SLUSA require withdrawal of the reference);

Rietema Deci. Ex. E (Order, Picard v. Kohn, No. 11 -1181 (JSR) (S.D.N.Y. June 6, 2011)

(Docket No. 34) ("Kohn Order") (same)); Rietema Decl. Ex. F (Letter from Judge McMahon to

All Counsel, Picard v. UBS AG, et al., No. 11 -4213 (CM) (S.D.N.Y. July 14, 2011) (Docket No.


9) ("[If the] issues of standing and SLUSA preemption also arise in the LIF action, the reference

will plainly be withdrawn[.]")).2

Fourt, the Trustee's common law claim will also require a court to consider the

additional threshold issue of whether this claim is preempted by SLUSA, which must also be

decided under the federal securities laws. Every court to consider this issue in this district has

likewise concluded that withdrawal of the reference is required. See, e.g., HSBC I, 450 B.R.

406, 410, 413; Rietema Decl. Ex. D (Maxam Order); JPMorgan, 2011 WL 2119720, at * 4;

Rietema Decl. Ex. E (Kohn Order); Rietema Decl. Ex. F (Letter from Judge McMahon to All

Counsel, Picard v. UBS AG. et al., No. 11 -4213 (CM) (S.D.N.Y. July 14, 2011) (Docket No. 9)).

Fifth, the Trustee's claims under the Bankruptcy Code also seek to recover a

transfer made by Equity Trading to BNPP Arbitrage pursuant to SIPA despite the fact that this

transfer took place outside of the United States. Therefore, the Trustee's claims will require a

determination whether SIPA applies extraterritorially in light of Morrison v. Nat'l Austl. Bank

Ltd., 130 S. Ct. 2869 (2010). BNPP Arbitrage intends to demonstrate that it does not. Whether

Morrison's presumption against the extraterritorial application of SIPA bars the Trustee's

avoidance claims in this case will be one of the critical issues of non-bankruptcy federal law that

a court must resolve and that should dispose of the Trustee's subsequent transfer claims against

BNPP Arbitrage.

Accordingly, the reference to the Bankruptcy Court must be withdrawn in this

2 In Picard v. UBS AG. et al., the Court granted permissive withdrawal because the Trustee voluntarily

dismissed his common law claims against the UBS defendants to avoid mandatory withdrawal on the issues of hisstanding to assert such claims under SIPA and SLUSA preemption. See Rietema Decl. Ex. G (Order, Picard v. UBSAG, et al., No. 11-4213 (CM) (S.D.N.Y. July 27, 2011) (Docket No. 12); see also Rietema Decl. Ex. H (Letter fromJudge McMahon to All Counsel, Picard v. UBS AG et al., No. 11-4213 (CM) (S.D.N.Y. July 19, 2011) (Docket No.10) ("1 have Mr. Picard's position, which is that he has withdrawn his non-bankruptcy claims ..... )


case so that an Article III judge may decide these significant non-bankruptcy federal law issues.

BACKGROUND 3

On November 3 0, 2010, the Trustee commenced this adversary proceeding in the

Bankruptcy Court. The Trustee's complaint (the "Complaint")4 names as defendants Equity

Trading, Equity Trading Fund, Ltd. ("ETF"), and BNPP Arbitrage, which the Tr-ustee alleges

received from Equity Trading a subsequent transfer of funds that originated from BLMIS in a

transfer controlled and arranged by ETF. The Complaint asserts several claims under the

Bankruptcy Code and the NYDCL seeking recovery of an alleged subsequent transfer and a

common law claim for money had and received.

The Complaint purports to assert against BNPP Arbitrage a common law claim of

money had and received (Count 10), Rietema Decl. Ex. A (Cmpl. TT 165 -67), seeking the return

of certain monies that originated from BLMIS. The Trustee is explicit that he purports to bring

this common law claim on behalf of BLMIS customers as subrogee, bailee, and assignee of their

property under SIPA. Rietema Decl. Ex. A (Cmpl. T 10). In essence, the Trustee contends-

without the benefit of any well-pled factual allegations and without any foundation whatever-

that BNPP Arbitrage was purportedly aware of supposed "red flags" concerning BLMIS, but

nevertheless invested in Equity Trading and received subsequent transfers of funds that

originated at BLMIS. (Of course, even the Trustee does not-and cannot-allege that BNPP

Arbitrage was actually aware that BLMIS was a Ponzi scheme or that it engaged in any

3 The facts summarized in this Background section are based exclusively on the allegations in the Trustee'sComplaint in this action. BNPP Arbitrage does not accept these allegations as true.

4 The Trustee has indicated that he intends to amend the Complaint. The parties have entered into astipulation under which the Trustee has until January 13, 2012 to file an amended complaint. Nevertheless, BNPPArbitrage does not believe that the amendment will moot the grounds for withdrawal of the reference assertedherein.


wrongdoing.) Additionally, the Complaint purports to assert against BNPP Arbitrage two counts

under federal and state avoidance law, based on the same allegations underlying the Trustee's

conmnmon law claim, seeking (again) the return of an alleged subsequent transfer received by

BNPP Arbitrage. Rietema Dccl. Ex. A (Cmpl. IT 154-64). The Trustee's allegations against

BNPP Arbitrage are baseless.

Judge Rakoff dismissed similar preference claims and constructive fraudulent

transfer claims, and state law avoidance claims brought by the Trustee as being barred by the

Section 546(e) safe harbor. Picard v. Katz, No. 1 1-3605 (JSR), 2011 WL 4448638 (S.D.N.Y.

Sept. 27, 2011), at *2-.3. Thus, the Katz ruling limits the Trustee's ability to clawback only

actual fraudulent transfers made in the two years prior to BLMIS's bankruptcy. Additionally,

Judge Rakoff dismissed similar common law claims brought by the Trustee against HSBC for

lack of standing, Picard v. HSBC Bank PLC, 454 B.R. 25 (S.D.N.Y. 2011) ("HSBC 11"), and the

Trustee has therefore voluntarily dismissed without prejudice the common law claims he has

asserted in other actions. See, e.g., Stipulation and Order, Picard v. Maxam Absolute Return

Fud .. No. 11-3261 (JRS) (S.D.N.Y. Aug. 30, 2011) (Docket No. 27); Notice of Voluntary

Dismissal Without Prejudice, Picard v. Repex Ventures SA, No. 11-3477 (BRL) (S.D.N.Y. Aug.

30, 2011) (Docket No. 15). Despite these clear rulings, the Trustee has not yet dismissed the

Bankruptcy Code and NYDCL subsequent transferee claims or the money had and received

claim he has asserted here.

ARGUMENT

A standing Order of this Court, dated July 10, 1984 (Ward, Acting C.J.),

automatically refers to the Bankruptcy Court all Title 11I cases and proceedings commenced in

this district. Notwithstanding the standing Order, 28 U.S.C. § 157(d) provides for mandatory


and discretionary withdrawal of the reference as follows:

The district court may withdraw, in whole or in part, any case or proceedingreferred under this section, on its own motion or on timely motion of any party,for cause shown. The district court shall, on timely motion of a party, sowithdraw a proceeding if the court determines that resolution of the proceedingrequires consideration of both title 11 and other laws of the United Statesregulating organizations or activities affecting interstate commerce.

28 U.S.C. § 157(d) (emphasis added). Section 157(d) applies in SIPA liquidation proceedings.

See, e.g., HSBC 1, 450 B.R. at 410 (withdrawing the reference of an adversary proceeding to a

SIPA liquidation requiring "substantial and material" consideration of SIPA and SLUSA);

JPMorg~an, 2011 WL 2119720, at *4; Mishkin v. Ageloff, 220 B.R. 784, 795-98 (S.D.N.Y. 1998)

(withdrawing the reference of an adversary proceeding to a SIPA liquidation requiring

"substantial and material consideration" of the PSLRA).

Withdrawal is mandatory where, as here, "substantial and material consideration

of non-Bankruptcy Code federal [law] is necessary for the resolution of the proceeding."

Shugrue v. Air Line Pilots Ass'n Int'l (In re Ionosphere Clubs, Inc.), 922 F.2d 984, 995 (2d Cir.

1990)); see also City of New York v. Exxon Corp., 932 F.2d 1020, 1026 (2d Cir. 199 1)

(withdrawal is mandatory where the proceeding requires "significant interpretation, as opposed

to simple application, of federal laws apart from the bankruptcy statutes"). In other words,

[s]ection 157(d) reflects Congress's perception that specialized courts should belimited in their control over matters outside their areas of expertise. Thisprovision also assures litigants that under certain circumstances their assertion ofa federally created right will be considered outside the narrow confines of abankruptcy court proceeding by a district court, which considers laws regulatinginterstate commerce on a daily basis and are "better equipped to determine themthan are bankruptcy judges."

AT&T Co. v. Chateaugay Corp., 88 B.R. 581, 583 (S.D.N.Y. Apr. 22, 1988) (quoting 1 Collier

on Bankrutcy T 3.01 at 3-53 (15th ed. 1986)). In determining whether withdrawal of the

reference is mandatory, a district court "need not evaluate the merits of the parties' positions,"


but rather need only decide whether the proceeding will involve "substantial and material

consideration" of non-bankruptcy federal law. Bear, Steams Sec. Corp. v. Gredd, No. 01-4379

(NRB), 2001 WL 840187, at *3.4 (S.D.N.Y. July 25, 2001) (internal quotations and citations

omitted).

The "substantial and material consideration" test does not require that an issue be

one of first impression to warrant mandatory withdrawal. See JPMorgan, 2011 WL 2119720, at

*4. Instead, Judge McMahon noted in granting a motion to withdraw the reference in Picard v.

JPMorgan Chase & Co. where, as here, the Trustee asserted common law claims "[rlegardless of

a bankruptcy court's familiarity with a statute outside of Title 11, the requirements for

mandatory withdrawal are satisfied if the proceeding requires consideration of a law outside of

Title 11." Id.

Applying these standards, and for the reasons stated below, the Court should

withdraw the reference of this action to the Bankruptcy Court.

POINT I

THE APPLICATION OF SECTION 546(e) OF THE BANKRUPTCY CODEIN THE CONTEXT OF THIS SIPC PROCEEDING RAISES

SUBSTANTIAL ISSUES OF NON-BANKRUPTCY FEDERAL LAW

The resolution of this action will require a court to engage in significant

interpretation of SIPA to determine whether the Section 546(e) safe harbor, which immunizes

from avoidance certain transactions deemed preference payments and certain transactions made

more than two years prior to a debtor's bankruptcy, applies in a SIPA liquidation. If this safe

harbor applies, as Judge Rakoff has already ruled it does, the Trustee, as a matter of law, cannot

avoid the alleged payment made from BLMIS to Equity Trading as a preference payment or a

constructive fraudulent transfer. Nor could the Trustee recover under state law avoidance


statutes. Katz, 2011 WL 444863 8, at *2-.3 (dismissing constructive fraudulent transfer and state

law avoidance claims as barred by the Section 546(e) safe harbor). BNPP Arbitrage plans to

assert the Section 546(e) safe harbor with respect to several of the avoidance claims.

Section 546(e) of the Bankruptcy Code provides that a "trustee may not avoid a

transfer. ... that is a transfer made by or to ... [a] stockbroker [or] financial institution .. , in

connection with a securities contract... I 11 U.S.C. § 546(e). Section 546(e) is one of several

Bankruptcy Code provisions that preclude the avoidance of certain transfers and seek to balance

the avoidance powers of the Trustee with the need to protect the securities and financial markets

from disruption. As the Court of Appeals for the Second Circuit recently noted, these policy

goals require that the protections of the safe harbors be interpreted "extremely broad[ly]." In r

Enron Creditors Recovery Corp., 651 F.3d 329, 334 (2d Cir. 2011); see also Official Comm. of

Unsecured Creditors of Quebecor World (UJSA) Inc. v. Am. United Life Ins. Co. (In re Ouebecor

World (USA) Inc.), 453 B.R. 201, 211 (Bankr. S.D.N.Y. July 27, 2011) ("It is appropriate to

resolve a dispute over the legal application of a safe harbor provision in the context of a

dispositive motion .... Indeed, concluding as a general matter that all safe harbor disputes must

proceed to trial would effectively undermine the objective legal certainty of securities

transactions that motivated Congress' adoption of the safe harbor provisions.").

Applied here, Section 546(e) protects from avoidance the alleged transfer by

BLMIS to Equity Trading as a preference payment or a constructive fraudulent transfer. 5

5 The Trustee also asserts an actual fraudulent transfer claim in the Complaint. To avoid and recover thealleged fraudulent transfer, the Trustee will have to overcome the defendants' good faith and value defenses. Thedetermination of the applicable standard for what constitutes good faith also requires significant interpretation ofnon-bankruptcy federal law. Indeed, in &az citing federal securities law standards, Judge Rakoff found that theTrustee would have to prove that the defendants had actual knowledge of the fraud or were willfully blind in orderto avoid an alleged fraudulent transfer. Katz, 2011 WL 4448638, at *5.


Moreover, because Section 550 permits recovery of "avoided" transfers pql, the Trustee cannot

recover the value of any such alleged preferential or constructive fraudulent transfers from a

subsequent transferee, such as BNPP Arbitrage. See I11 U.S.C. § 550 ("to the extent that a

transfer is avoided. ... the trustee may recover .. . the value of such transfer" from a subsequent

transferee) (emphasis added).

In an attempt to escape the application of this safe harbor, the Trustee will likely

argue, as he has consistently done elsewhere, that the safe harbor does not apply in any SIPA

liquidation. See, e.g., Trustee's Mem. In Opp. to the Sterling Defs.' Mot. to Dismiss or, in the

Alternative, for Summ. J., Picard v. Katz, No. 10- 5287 (BRL) (Bankr. S.D.N.Y. May 19, 2011)

(Docket No. 49) at 90.6 That argument will thus require a court to decide significant issues

requiring the interpretation of SIPA, a non-bankruptcy statute. Accordingly, a district court is

the only proper forum for this issue, and the Court should withdraw the reference of this action.

See. e.g., Rietema Dccl. Ex. B (Order, Katz, (Docket No. 19) (withdrawing the reference on the

issue of whether the Section 546(e) safe harbor applies in a SIPA liquidation)); see also Rietema

Decl. Ex. C (Order, Greiff, (Docket No. 19) (same)); In re Dana Corp., 379 B.R. 449, 459

(S.D.N.Y. 2007) (withdrawal is mandatory "even where a non-bankruptcy federal statute only

'arguably conflicts' with the Bankruptcy Code"); Rietema Decl. Ex. I (Tr. of Oct. 3, 2011 Hr'g,

Picard v. Kelman Partners Ltd. P'ship. et al., No. 11-5513 (JSR) (S.D.N.Y.) (Docket No. 4) at

14:19-25 ("The Second Circuit, just a few weeks before I rendered my decision, rendered its

decision on 546 in the Enron case. In the Enron case, Judge Walker, speaking for the court, said

6 After Judge Rakoff considered and rejected this very argument, the Trustee's counsel represented that theTrustee would seek appellate review of Judge Rakoff s decision. See Katz' 2011 WL 444863 8; Rietema Deci. Ex. J(Tr. of Sept. 28, 2011 Hr'g, Picard v. Katz, 11-3605 (JSR) (S.D.N.Y.) (Docket No. 43) at 18:20-25). On October 7,2011, the Trustee filed a Motion to Direct Entry of Final Judgment Under Federal Rule of Civil Procedure 54(b) andfor Certification Under 28 U.S.C. 1292(b). Picard v. Katz, No. 11-3605 (JSR) (S.D.N.Y. Oct. 7, 2011) (Docket No.46). The Trustee reiterated this argument in support of his request that the court certify its decision for appeal.

10


that it represented a collision course, those were his exact words, between the bankruptcy laws

and the securities laws, and if that's not a clear statement of a need for withdrawal, I don't know

what is.")).

POINT 11

ISSUES CONCERNING THE BANKRUPTCY COURT'SJURISDICTION UNDER STERN V. MARSHALL RAISE

SUBSTANTIAL ISSUES OF NON-BANKRUPTCY FEDERAL LAW

The Supreme Court's recent ruling in Stem v. Marshall, that a bankruptcy court

cannot address to final judgment private law claims independent of the claims adjudication

process, will require a court to engage in substantial interpretation of unsettled non-bankruptcy

federal law concerning whether the Bankruptcy Court has subject matter jurisdiction and

constitutional authority to hear cases such as this one. BNPP Arbitrage will demonstrate that,

under Stem v. Marshall, the Bankruptcy Court lacks constitutional power to render a final

decision on an estate's claims, including subsequent transfer claims under the Bankruptcy Code

and common law claims, against those not filing proofs of claim. Stem v. Marshall, 131 S.Ct.

2594, 3611 (2011); see also In re Blixseth, No. 09-60452-7, 2011 WL 3274042, at * 11 (Bankr.

D. Mont. Aug. 1, 2011). Otherwise, the Bankruptcy Court would be "exercis[ing] the essential

attributes of judicial power that are reserved for Article III Courts." Stem, 131 S.Ct. at 2619

(internal quotations and citation omitted). Thus, a bankruptcy judge may hear claims tied to the

claims allowance process, but may not hear those that seek to augment a bankruptcy estate.

Granfinancierav. Nordberg, 492 U.S. 33, 56 (1989); Blixseh 2011 WL 3274042, at *l1.

Indeed, "Congress may not bypass Article III simply because a proceeding may have some

bearing on a bankruptcy case; the question is whether the action at issue stems from the

bankruptcy itself or would necessarily be resolved in the claims allowance process." Stem, 131


S. Ct. at 2618 (emphasis in original).

BNPP Arbitrage did not file a proof of claim in the SIPA liquidation. Hence,

there is no possibility that determination of the Trustee's claims against BNPP Arbitrage will

implicate the claims adjudication process. All of the Trustee's claims are private law matters

under Stem. See Stem, 131 S. Ct. at 2614; see also Blixseth, 2011 WL 3274042, at * 11. The

very purpose of the Trustee's Complaint is to recover millions of dollars to augment the BLMIS

estate. The Trustee's claims against BNPP Arbitrage are therefore no different from those at

issue in Stem, and the Bankruptcy Court does not have constitutional authority to adjudicate

these claims to final judgment. At the very least, this is an issue of first impression, and it must

be determined by an Article III court. Bear, Steams, 2001 WL 840187, at *2 (quoting Mishkin,

220 B.R. at 796).'

POINT III

WHETHER THE TRUSTEE HAS STANDING TO ASSERT COMMON LAWCLAIMS RAISES SUBSTANTIAL ISSUES OF NON-BANKRUPTCY FEDERAL LAW

The Court also should withdraw the reference because the Trustee purports to use

"the general powers of a bankruptcy trustee in a case under the Bankruptcy Code" and "broad

powers granted by SIPA" to assert a common law money had and received claim to recover

monies which allegedly "belong to the customer fund under the Trustee's control." Rietema

Deci. Ex. A (Cmpl. TT 8, 10, 166). He claims that Section 78fff-1 of SIPA confers on him

standing to sue third parties on behalf of BLMIS customers "as bailee of Customer Property," as

7 In addition, withdrawing the reference here will promote judicial efficiency, prevent delay and limit cost tothe parties. For example, a decision by the Bankruptcy Court is likely to materially slow the progress of this action,as it will result in protracted motion practice on whether the Bankruptcy Courts lacks constitutional authority underStem. Withdrawal of the reference would avoid this result and limit unnecessary costs, and is therefore appropriate.See Northwest Airlines. Inc. v. Los Angeles (In re Northwest Airlines Corp.), 384 B.R. 51, 56 (S.D.N.Y. 2008).This conclusion supports permissive withdrawal of the reference.


assignee of "multiple, express assignments of certain claims of the applicable accountholders,"

and as "subrogee of claims paid, and to be paid, to customers of BLMIS who have filed claims in

the liquidation proceeding." Rietema Deci. Ex. A (Cmpl. T 165). Every court in this district to

consider the validity of this assertion of standing by the Trustee under SIPA has held that it

"presents[] difficult questions under non-bankruptcy federal law," requiring mandatory

withdrawal of the reference. HSBC L, 450 B.R. at 410; see also JPMoruan, 2011 WL 2119720,

at **6-7; Rietema Decl. Ex. E (Kohn Order); Rietema Decl. Ex. D (Maam Order). So too here.

BNPP Arbitrage rejects the Trustee's unprecedented and unsubstantiated

interpretation of SIPA as a means of circumventing well-settled law to assert a common law

claim against BNPP Arbitrage on behalf of BLMIS customers. BNPP Arbitrage will show that,

as Judge Rakoff has ruled, SIPA does not confer standing on the Trustee to bring damages

claims on behalf of BLMIS customers, because a SIPC trustee cannot bring common law claims

on behalf of customers that an ordinary Title 11 bankruptcy trustee could not bring. See HSBC

H, 454 B.R. at 30-3 1. The Trustee has resorted to these novel theories of standing because he is

barred from bringing common law claims on behalf of BLMIS itself under the "Wagoner rule,"

which provides that a "claim against a third party for defrauding a corporation with the

cooperation of management accrues to creditors, not to the guilty corporation." Shearson

Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 120 (2d Cir. 199 1); see also Kirschner v. KPMG

LLP, 938 N.E.2d 941, 950 (2010) (reaffirming the inpari delicto defense for third party service

providers sued by the trustee for a corporation whose management committed fraud). "[A]

bankruptcy trustee has no standing generally to sue third parties on behalf of the estate's

creditors, but may only assert claims held by the bankrupt corporation itself." Wagoner, 944

F.2d at 118 (citation omitted).


That is why Judge Rakoff has already held in HSBC I1 that the Trustee lacks

standing to pursue common law claims under SIPA on behalf of BLMIS customers as either

bailee, subrogee or assignee of common law claims belonging to BLMIS customers. See FISBC

HI 454 B.R. at 29-33. Id. In rejecting the Trustee's "convoluted" standing theories, Judge

Rakoff engaged in a substantial and material interpretation of SIPA, a federal securities law.

Additionally, because the Trustee maintained that he has standing to assert common law claims

on behalf of BLMIS customers as bailee and subrogee of their property under Redington v.

Touche Ross & Co., 592 F.2d 617 (2d Cir.1978), rev'd on other grounds, 442 U.S. 560, 99 S.Ct.

2479 (1979), in HSBC I1, Judge Rakoff also had to address whether Reigon was still good

law in view of the Supreme Court's subsequent decisions in Touche Ross & Co. v. Redingto,

442 U.S. 560, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979), and Holmes v. Sec. Investor Prot. Corp., 503

U.S. 258 (1992), which cast doubt on the continued viability of Redingto . See HSBC 11, 454

B.R. at 34-36. As Judge McMahon noted in JPMorgan, "[a] bankruptcy court is not the forum

for deciding whether a decision of the Supreme Court effectively overruled a Second Circuit

decision." 2011 WL 2119720, at *6.

Accordingly, the Trustee's attempt to assert a common law claim against BNPP

Arbitrage raises a substantial and material question under non-bankruptcy federal law, which

mandates withdrawal of the reference.

POINT IV

WHETHER THE TRUSTEE'S COMMON LAW CLAIMS ARE PREEMPTED BYSLUSA RAISES SUBSTANTIAL ISSUES OF NON-BANKRUPTCY FEDERAL LAW

Even if the Trustee had standing to make his common law claim under SIPA and

the Bankruptcy Court had jurisdiction to adjudicate such a claim, the next threshold issue-

whether this common law claim is preempted by SLUSA-also requires withdrawal of the


reference. 15 U.S.C. § 78bb. SLUSA is a federal securities law that Congress enacted to prevent

plaintiffs from trying to circumvent the heightened pleading requirements of the Private

Securities Litigation Reform Act of 1995 (the "PSLRA"). See Ring v. AXA Fin.. Inc., 483 F.3d

95, 97-98 (2d Cir. 2007) (describing history of PSLRA and SLUSA). SLUSA mandates the

dismissal of claims when "1I) a suit is a covered class action; 2) brought under state or local law;

3) concerning a covered security; and 4) the defendant is alleged to have misrepresented or

omitted a material fact or employed a manipulative device or contrivance 'in connection with the

purchase or sale' of that security." In re Kingate Mgmt. Ltd. Litig., No. 09-53 86 (DAB), 2011

WL 1362106, at *6 (S.D.N.Y. Mar. 30, 2011) (citing Barron v. Igolnikov, No. 09-4471, 2010

WL 882890 at *3-5) (S.D.N.Y. Mar. 10, 2010). In this circuit, SLUSA preemption must be

determined on a claim-by-claim basis. Id.

Every court to consider the question of whether SLUSA preempts the Trustee's

common law claim has held that such a determination requires substantial and material

interpretation of non-bankruptcy federal law, and therefore, withdrawal of the reference to the

Bankruptcy Court. J oran, 2011 WL 2119720, at *4; see also HSBC 1, 450 B.R. at 413;

Rietema Deci. Ex. E (Kohn Order); Rietema Deci. Ex. D (Maxiam Order). In particular, whether

the Trustee's action-in which he seeks damages on behalf of thousands of BLMIS customers,

Rietema Decl. Ex. A (Cmpl. T 1 0)-constitutes a "covered class action" under SLUSA "is a

novel question of non-bankruptcy federal law that should be determined by an Article III judge."

HSBC I, 454 B.R. at 413; see also JPMorgan 2011 WL 211720, at *5. To date, no Article III

court in this circuit has ruled on whether SLUSA preempts actions in which a SIPC trustee

purports to make common law claims on behalf of brokerage customers, which makes

withdrawal of the reference particularly appropriate.


In this case, BNPP Arbitrage will demonstrate that the Trustee's common law

claim is preempted by SLUSA because it is a common law claim-for money had and

received-alleging misrepresentations or omissions of material fact in connection with the

purchase or sale of "covered securities," i.e., the common stocks in the S&P 100 Index that

Madoff claimed that BLMIS purchased and sold on behalf of its customers. See Rietema Decl.

Ex. A (Cmpl. T 24) ("Although clients of the IA Business received monthly or quarterly

statements purportedly showing the securities that were held in - or had been traded through -

their accounts, as well as the growth of and profit from those accounts over time, the trades

reported on these statements were a complete fabrication."). Whether BLMIS's purported

purchase of securities is sufficient to satisfy SLUSA' s "covered security" requirement is a

question requiring the interpretation of SLUSA. That is why, earlier this year, in a putative

consolidated class action litigation, Judge Batts dismissed as preempted by SLUSA common law

claims asserted by investors in the Kingate Funds similar to the common law claim asserted here

by the Trustee on behalf of BLMJS customers. See In re Kingate Mgmt. Ltd. Litig., 2011 WL

1362106, at *9.8 In Kingate, plaintiff investors sought to recover damages on various common

law theories of tort, restitution, and third-party beneficiary breach of contract. Judge Batts held

that SLUSA's "in connection with" requirement was satisfied because the alleged

misrepresentations "coincided" with the purchase or sale of covered securities, which in that case

were the securities that Madoff purportedly purchased on the New York Stock Exchange using

investors' money received from the Kingate Funds. Id.9

8 Plaintiffs filed a notice of appeal of this decision on April 11, 2011. See Notice of Appeal, In re Kingate

Management, No. 11-1397 (2d Cir. Apr. 11, 2011) (Docket No. 1).

9 Consistent with Judge Batts's decision in Kigae five judges in this circuit, in nine written opinions, havefound that SLUSA bars claims indistinguishable from those made by plaintiffs in Kingate-i.e., claims that defendants

16


Because the effect of SLUSA on the Trustee's claims will need to be determined,

the reference must be withdrawn.

POINT V

WHETHER SIPA APPLIES EXTRATERRITORIALLY RAISESSUBSTANTIAL ISSUES OF NON-BANKRUPTCY FEDERAL LAW

The resolution of the Trustee's claims also will necessarily require significant

interpretation of SIPA and the presumption against its application extraterritorially under

Morrison v. Nat'l Austl. Bank Ltd., 13 0 S. Ct. 2869 (2010). Whether Morrison's presumption

against extraterritorial application of U.S. law bars the Trustee's avoidance claims will be

another one of the critical issues of non-bankruptcy federal law that a court will need to

determine and that will likely dispose of the Trustee's subsequent transfer claim against BNPP

Arbitrage. Withdrawal of the reference is mandatory for this reason also.

BNPP Arbitrage will demonstrate that SIPA does not apply extraterritorially

under Morrison. The Supreme Court made clear that "[w]hen a statute gives no clear indication

of an extraterritorial application, it has none." Morrison, 130 5. Ct. at 2878. The Trustee's

subsequent transfer claim against BNPP Arbitrage is asserted pursuant to SIPA. However, SIPA

contains no clear indication of any extraterritorial application, and therefore, it has none. To the

extent SIPA incorporates by reference certain avoidance provisions of the Bankruptcy Code,

misrepresented (i) the investment strategy Madoff would employ on behalf of pooled investment vehicles in whichplaintiffs invested and (ii) the extent to which defendants would monitor Madoffs investment activity. See In reMerki, No. 08-10922 (DAB), 2011 WVL 4435873 (S.D.N.Y. Sept. 23, 2011); In re J.P. Jeanneret Assocs.. Inc., 769 F.Supp. 2d 340, 379 (S.D.N.Y. 2011); Wolf Living Trust v. FM Multi-Strategy Inv. Fund, LP, No. 09-1540 (LBS), 2010WVL 4457322, at *2..3 (S.D.N.Y. Nov. 2, 2010); Newman v. Family Mgmt Corp., 748 F. Supp. 2d 299, 311-13(S.D.N.Y. 20 10); In re Beacon Assocs. Litig., 745 F. Supp. 2d 3 86, 431 (S.D.N.Y. 20 10), reconsideration denied (Dec.7,2010); Barron v. Igolnikov, No. 09 Civ. 4471 (TPG), 2010 WL 882890, at **3-.5 (S.D.N.Y. Mar. 10, 2010); Backusv. Conn. CMt. Bank, N.A., No. 09-1256 (PCD), 2009 WL 5184360, at **4-.10 (D. Conn. Dec. 23, 2009); Levinson v.PSCC Serv.. Inc., No. 09-00269 (PCD), 2009 WVL 5184363 (D. Conn. Dec. 23, 2009).


those provisions likewise contain no clear indication of an extraterritorial application. Indeed,

even prior to Morrison, various courts, including one in this circuit, held that certain avoidance

provisions in the Bankruptcy Code did not apply extraterritorially. See Maxwell Comrnc' n

Corp. PLC v. Societe Gen. PLC (In re Maxwell Conmc'n Corp. PLC), 186 B.R. 807, 818

(S.D.N.Y. 1995) (holding that presumption against extraterritoriality prevented application of §

547 of the Bankruptcy Code to foreign transfers); Barclay v. Swiss Fin. Cor-. (In re Bankr.

Estate of Midland Euro Exch. Inc.), 347 B.R. 708, 720 (Bankr. C.D. Cal. Aug. 16, 2006)

(holding that presumption against extraterritoriality prevented application of § 548 of the

Bankruptcy Code to foreign transfers). Clearly, this issue of SIPA and the Bankruptcy Code

interpretation "requires consideration of both title 11 and other laws of the United States,"

mandating withdrawal of the reference. 28 U.S.C. § 157(d).

Here, the Trustee alleges that BNPP Arbitrage, a French entity, received a

subsequent transfer from Equity Trading, a BVI-registered entity that in turn received payments

from its account with BLMIS. Rietema Decl. Ex. A (Cmpl. TT 2, 11, 13, 100). This transfer

plainly occurred outside the United States. While BNPP Arbitrage strongly disputes that SIPA

applies extraterritorially in light of Morrison, this is an issue of first impression that requires

significant interpretation of SIPA, and is a task that must be carried out by an Article III court.

Bear, Stearns, 2001 WL 840187, at *2 ("'[W]here matters of first impression are concerned, the

burden of establishing a right to mandatory withdrawal is more easily met."') (omitting internal

quotations and citations). That is why, in a related adversary proceeding, Judge Rakoff recently

granted defendants' motion to withdraw the reference, holding that determination of another

non-bankruptcy federal statute under which the Trustee made claims could be applied

extraterritorially would require significant interpretation of that statute. See Rietema Decl. Ex. K


(Order, Picard v. Kohn, No. 11-1181 (JSR) (S.D.N.Y. Sept. 6, 2011) (Docket No. 55) (involving

RICO Claims)). The same result should follow here.

CONCLUSION

This action raises numerous issues that require significant interpretation of federal

and constitutional law regarding subject matter jurisdiction, SIPA, other securities laws and their

relationship with the Bankruptcy Code. This Court should therefore withdraw the reference of

this action to the Bankruptcy Court for the resolution of these issues.

Dated: October 31, 2011

New York, New York

CLEARY GOTTLIEB STEEN & HAMILTON LLP

L iwrence B. Fri dmanreon S. Peace

One Liberty PlazaNew York, New York 10006(212) 225-2000(212) 225-3999 (facsimile)[email protected]~cgsh.com

Attorneys for BNP Paribas Arbitrage, SNCOf Counsel:

Kathleya ChotirosJamie Rietema


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