JP Morgan filed a strongly-worded reply in support of its effort to win dismissal of Madoff trustee Irving Picard's suit seeking billions from the bank. In a September 16th filing, JPMorgan ("JPM") argued not only that Picard was "mistaken" in bringing the claims, but that his rationale was contrary to established legal precedent and was "clearly wrong". Picard is currently seeking nearly $20 billion in damages from JPM, claiming that their longstanding banking relationship with Madoff both lent an air of legitimacy to the scheme and further allowed Madoff to continue defrauding victims despite numerous red flags. While he initially sought $5.4 billion, Picard later tripled the amount sought in an amended complaint, asserting numerous common law claims.
JPM is quick to point out that Picard's approach in seeking damages from various financial entities associated with Madoff based on common law theories has not been well received, most recently in Judge Jed Rakoff's dismissal of similar claims asserted against HSBC. The crux of Judge Rakoff's reasoning, and unsurprisingly strongly asserted by JPM, rested in the premise that a bankruptcy trustee, who stands in the shoes of the debtor, cannot simultaneously bring claims on behalf of creditors. As JPM states,
Since the Supreme Court’s decision in Caplin v. Marine Midland, 406 U.S. 416 (1972), it has been settled law that a trustee for a bankrupt corporation does not have power to assert claims belonging to the debtor’s creditors.
In his Response to JPM's Motion to Dismiss, Picard had stated that his authority to pursue claims against JPM stemmed from Section 544(a) of the Bankruptcy Code, which endows a trustee with the rights of a “creditor that extends credit to the debtor at the time of the commencement of the case.” 11 U.S.C. § 544(a). However, such a grant of rights does not equate to a carte blanche to pursue claims that, according to JPM, rest solely with third-party creditors. As JPM so eloquently states, Picard does not represent the interests of third-party creditors, but rather, "stands in the shoes of a thief."
JPM also reverts to its original claim that Picard had failed to sufficiently plead his claims above the required legal standard, pointing to the "massive gap between the Trustee’s blustering accusations and the facts that he has actually alleged to support them. Despite taking extensive pre-trial discovery, the Trustee has still completely failed to allege facts showing that any individual at JPMorgan had actual knowledge of Madoff’s fraud." In doing so, JPM highlights the increasingly heightened standard in which financial institutions can be held liable for fraud committed by customers. Courts have increasingly adopted an "actual knowledge" standard, rather than what an institution should have known based on the presence of red flags.
Finally, JPM contests Picard's claim that a trustee appointed under the Securities Investor Protection Act ("SIPA") has even greater powers than a trustee proceeding under the United States Bankruptcy Code. In doing so, JPM argues that nothing provides Picard with authority for such an interpretation, and cites Judge Rakoff's rationale in the recent HSBC decision that "the Trustee’s powers are cabined by Title 11, and SIPA conveys no authority to a SIPA trustee to bring the common law claims here in issue.”
With this filing, absent the request by Picard to file a sur-reply, briefing of the issue is now complete. A hearing may also be scheduled before United States District Judge Colleen McMahon, who is overseeing the case.
JPMorgan's Reply in Support of its Motion to Dismiss is here.
The Amended Complaint filed against JPMorgan is here.