Irving H. Picard, Trustee for the Liquidation of B v. Alpha Prime Fund Limited et al

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re: 	:
: 	SIPA LIQUIDATION
BERNARD L. MADOFF INVESTMENT 	:
SECURITIES LLC, 	: 	Adv. Pro. No. 08-01789 (SMB)
:
Debtor. 	:
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IRVING H. PICARD, Trustee for the 	:
Liquidation of Bernard L. Madoff Investment 	:
Securities LLC, 	: 	Adv. Pro. No. 09-01364 (SMB)
:
Plaintiff, 	:
:
‒ against ‒ 	:
:
HSBC BANK PLC, et al., 	:
:
Defendants. 	:
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MEMORANDUM DECISION GRANTING HSBC
DEFENDANTS’ MOTION TO DISMISS CROSS-CLAIMS
A P P E A R A N C E S:
CLEARY GOTTLIEB STEEN & HAMILTON LLP
Attorneys for HSBC Defendants
One Liberty Plaza
New York, NY 10006
Thomas J. Moloney, Esq.
David E. Brodsky, Esq.
Joaquin N. Terceño, Esq.
Carolyn Chu, Esq.
Shira A. Kaufman, Esq.
Of Counsel
DUFFY AMEDEO LLP
Attorneys for Alpha Prime Fund Limited and Senator Fund SPC
275 Seventh Avenue, 7th Floor
New York, NY 10001
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Todd E. Duffy, Esq.
Douglas A. Amedeo, Esq.
Of Counsel
STUART M. BERNSTEIN
United States Bankruptcy Judge:
Irving H. Picard (the “Trustee”), as trustee of the liquidation of Bernard L.
Madoff Investment Securities LLC (“BLMIS”) under the Securities Investor Protection
Act of 1970 (“SIPA”), 15 U.S.C. §§ 78aaa, et seq., brought this adversary proceeding to
avoid and recover initial transfers made to numerous feeder funds, including Alpha
Prime Fund Limited (“Alpha”) and Senator Fund SPC (“Senator,” and with Alpha, the
“Funds”), and subsequent transfers made to, inter alia, the HSBC Securities Services
(Bermuda) Limited (“HSSB”), HSBC Institutional Trust Services (Bermuda) Limited
(“HITSB”), HSBC Bank Bermuda Limited (“HBB”), HSBC Securities Services
(Luxembourg) S.A. (“HSSL”), and HSBC Bank plc (“HSBC Bank,” and together with
HSSB, HITSB, HBB, and HSSL, the “HSBC Defendants”). 1 The Funds asserted
numerous cross-claims against the HSBC Defendants sounding in fraud, negligence and
gross negligence, breach of contract, breach of fiduciary duty, violations of Luxembourg
law and aiding and abetting for, among other things, failing to properly monitor and
manage the Funds’ investments in BLMIS, and in particular, appointing BLMIS as a
sub-custodian of their investments with BLMIS.
1 	The cross-claims against two of the original HSBC Defendants, Bank of Bermuda Limited (“BOB”)
and Bank of Bermuda (Luxembourg) S.A. (“BOBL”) have been dismissed. (See Stipulation and Order (1)
Dismissing Certain HSBC Cross-Claim Defendants without Prejudice and (2) Extending Remaining
HSBC Defendants’ Time to Respond to Cross-Claims, dated Sept. 12, 2011, at ¶ 1 (ECF Doc. # 130).)
Documents filed in this adversary proceeding are referenced as “ECF Doc. # __.”
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The HSBC Defendants have moved to dismiss the Funds’ cross-claims on
numerous grounds. (The HSBC Defendants’ Motion to Dismiss the Amended Cross-
Claims of Alpha Prime Fund Limited and Senator Fund SPC, dated Feb. 17, 2015
(“HSBC Motion”) (ECF Doc. # 369).) 	For the reasons that follow, the HSBC Motion is
granted based upon the lack of subject matter jurisdiction and the Court’s determination
not to exercise supplemental jurisdiction.
BACKGROUND
A. 	The Funds’ Relationship with the HSBC Defendants
The Funds were BLMIS feeder funds. (Answer, Affirmative Defenses and
Amended Cross-Claim of Alpha Prime Fund Limited and Senator Fund SPC, dated Dec.
8, 2014 (“Cross-Claim”), at ¶¶ 9, 17, 62 (ECF Doc. # 347).) 2 Alpha was formed under
the laws of Bermuda on March 12, 2003. (Id. at ¶ 19.) On that date, Alpha entered into
two agreements that bear directly on its cross-claims. First, it entered into a Custodian
Agreement with BOB (the “Alpha Custodian Agreement”) for the purposes, inter alia, of
holding and safeguarding Alpha’s cash and securities.3 The parties’ addresses were
listed as being in Hamilton, Bermuda, (Alpha Custodian Agreement at § 19), the
agreement was governed by Bermuda law, (id. at § 27), and the parties submitted to the
non-exclusive jurisdiction of the Bermuda courts to resolve any disputes relating to its
2 	The Cross-Claim begins on page 69 of the answer where the numbering of the paragraphs
restarts. The paragraph references are those corresponding to the Cross-Claim.
3 	A copy of the Alpha Custodian Agreement is annexed as Exhibit 4 to the Attorney Declaration of
Thomas J. Moloney in Support of HSBC Defendants’ Motion to Dismiss, dated Feb. 17, 2015 (“Moloney
Declaration”) (ECF Doc. # 368).
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terms. (Id.) BOB was authorized to appoint sub-custodians as it thought necessary to
perform its duties, but with certain exceptions, remained responsible for any acts or
omissions of the sub-custodian. (Id. at § 15(B).) Simultaneously with the execution of
the Alpha Custodian Agreement, BOB entered into a sub-custodian agreement with
HSSL.4 (Cross-Claim at ¶ 28.)
Second, Alpha entered into an Administration and Registrar Agreement with
Management International (Bermuda) Limited (“Alpha Administration Agreement” and
together with the Alpha Custodian Agreement, the “Alpha Agreements”). (See Moloney
Declaration, Ex. 5.)5 The Administrator could delegate its “functions, powers,
discretions, privileges and duties . . . to such person, firm or company on such terms and
conditions as are agreed between the Administrator and the Company.” (Id. at § 8(b).)
The Alpha Administration Agreement was governed by Bermuda law, and the parties
submitted to the non-exclusive jurisdiction of the Bermuda courts to resolve any
disputes relating to its terms. (Id. at § 20.) As in the case of the Alpha Custodian
Agreement, the parties listed their addresses as being in Bermuda. (Alpha
Administration Agreement § 14.) Simultaneously with the execution of the Alpha
4 	This allegation is contradicted by other allegations and appears to be incorrect. BOB was
acquired by HSBC Holdings plc in February 2004. (Cross-Claim at ¶ 4.) Prior to then, the sub-custodian
duties were performed by its wholly-owned subsidiary, BOBL. (See id. at ¶ 3.) It was BOBL that entered
into a sub-custodian agreement with BLMIS in September 2004, which it thereafter “transferred to
HSSL” in May 2005. (Id. at ¶ 32.)
5 	The Cross-Claim alleges that Management International (Bermuda) Limited was acting as agent
for BOB. (Cross-Claim at ¶ 29.) Judging from the Novation Agreements discussed in the succeeding text,
this appears to be the case.
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Administration Agreement, BOB entered into a sub-administration agreement with
HSSL. (Cross-Claim at ¶ 30.)6
By separate Novation Agreements dated Jan. 2, 2007, HITSB replaced BOB as
the Custodian, 7 and HSSB replaced BOB as Administrator. (See Fischer Declaration,
Ex. B.) The new Custodian and Administrator were also Bermuda entities. On or about
September 8, 2004, and allegedly without Alpha’s knowledge or consent, BOBL, the
sub-custodian, entered into a sub-sub-custody agreement with BLMIS (the “BLMIS
Sub-Custody Agreement”). (Cross-Claim at ¶ 32.)
Senator was formed under the laws of the Cayman Islands in July 2006. (Cross-
Claim at ¶ 62.) On August 4, 2006, Senator and HSSL entered into a Custodian
Agreement, (the “Senator Custodian Agreement”) (Moloney Declaration, Ex. 2), and an
Administration Agreement (the “Senator Administration Agreement” (id., Ex. 3), and
together with the Senator Custodian Agreement, the “Senator Agreements”). The
custodial and administrative duties were substantially the same as those under the
Alpha Agreements with one significant exception. The Senator Agreements were
governed by Luxembourg law, and the parties agreed that “the courts of Luxembourg
will have exclusive jurisdiction to resolve any disputes relating to the terms of this
Agreement.” (Senator Custodian Agreement at § 35; Senator Administration Agreement
at § 26.) The Cross-Claim further alleges that Senator also became a party to or
6 	For the reasons discussed in an earlier footnote, this is incorrect. BOB entered into a sub-
administration agreement with BOBL, the predecessor to HSSL.
7 	A copy of the Novation Agreement is annexed as Exhibit A to the Declaration of Peter Fischer in
Support of Response and Opposition of Alpha Prime Fund Limited and Senator Fund SPC to the HSBC
Defendants’ Motion to Dismiss the Amended Cross-Claims, dated Apr. 8, 2015 (ECF Doc. # 381) (“Fischer
Declaration”).
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beneficiary of the BLMIS Sub-Custody Agreement, (Cross-Claim at ¶ 34), without
Senator’s knowledge or consent. (Id. at ¶ 101.)
With BOB and BOBL out of the picture after their acquisition by HSBC, the
following table reflects the relationships between the Funds and the HSBC Defendants:
Alpha 	Senator
Administrator 	HSSB 	HSSL
Sub-Administrator 	HSSL 	None
Custodian 	HITSB 	HSSL
Sub-Custodian 	HSSL 	BLMIS
Sub-Sub-Custodian 	BLMIS 	None
Notably, Alpha had no direct contractual relationship with HSSL, and Senator had a
direct contractual relationship only with HSSL.
In addition, Alpha and HSBC Bank, a U.K. bank located in London, entered into a
foreign exchange facility, an overdraft facility and a currency swap agreement secured
by a pledge of the securities in Alpha’s BLMIS account. (Fischer Declaration at ¶ 17 &
Ex. E.) These agreements were governed by the laws of England and Wales, and the
parties irrevocably submitted to the non-exclusive jurisdiction of the courts of England
and Wales. Senator implies that it was a party to similar agreements. (See id. at ¶ 17.)
Finally, “[i]n August 2007, the HSBC Defendants commenced a leverage program
enabling potential investors to invest with Senator. Throughout August 2007 and
September 2007 investors invested in Senator using this leverage program, thereby
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making HSBC Bank an investor in Senator. “The HSBC Defendants used this as
additional comfort argument, asserting essentially that it had ‘skin in the game’.”
(Cross-Claim at ¶ 63.)
B. 	The Trustee’s Action
The Trustee commenced this adversary proceeding by filing a complaint on July
15, 2009, (ECF Doc. # 1), and he thereafter filed an amended complaint on December 5,
2010. (See “Amended Complaint,” dated Dec. 5, 2010 (ECF Doc. # 170).) His “short
and plain statement” of his claims runs on for 564 paragraphs and 182 pages. The
claims fall into two categories. First, the Trustee seeks to avoid and recover over $2
billion on account of fraudulent and preferential initial transfers made to various feeder
funds by BLMIS, (id. at Counts 1, 3-9) and subsequent transfers made by the feeder
funds to the HSBC Defendants in the form of fees. 8 (Id. at 2, 13-19.) Alpha and Senator
are among the initial transferees named in the Amended Complaint, and the Trustee
alleges that they received the following approximate amount of initial transfers within
six years, two years and ninety days of the BLMIS filing date, December 11, 2008: 9
6 Yr. Transfers 	2 Yr. Transfers 	90 Day Transfers
Alpha 	$ 85.8 million (¶ 334) 	$ 78.2 million (¶ 323) 	$ 49 million (¶ 344)
Senator 	$ 95.4 million (¶ 336) 	$ 95.4 million (¶ 325) 	$ 95.2 million (¶ 346)
8 	There are additional HSBC entities joined as defendants in the Amended Complaint, (see ¶¶ 95,
97, 102-07), but they are not the subject of the Funds’ cross-claims or the HSBC Motion. Unless
otherwise stated, the HSBC Defendants referred to in this opinion are limited to the defendants on the
cross-claims.
9 	The relevant paragraphs of the Amended Complaint are noted parenthetically in the table.
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All of these transfers involved the return of principal; neither Alpha nor Senator
received fictitious profits, and they are net losers among BLMIS’ investors.
The Amended Complaint did not identify any subsequent transfers, and instead,
alleged upon information and belief that the HSBC Defendants and others “received
subsequent transfers of the avoidable transfers referenced above.” (Amended
Complaint at ¶ 352.) However, the Trustee amplified this claim in a proposed Second
Amended Complaint, dated June 26, 2015 (“Proposed SAC”) (ECF Doc. # 399)
proffered in connection with the HSBC Defendants’ motion to dismiss based on
extraterritoriality and comity. The Trustee alleged that Alpha transferred the aggregate
approximate amount of $1,090,669 to HBB, HSSB, HITSB and/or HSSL, in monthly
fees for the services they rendered as Alpha’s custodian, administrator, registrar, sub-
custodian, sub-administrator, sub-registrar, and payment bank from March 2003 to
December 2008. (Proposed SAC at 384(b)(i).) The Court dismissed these subsequent
transfer claims. SIPC v. BLMIS (In re BLMIS), Adv. Pro. No. 08-01789 (SMB), slip op.
at 60-61 (Bankr. S.D.N.Y. Nov. 21, 2016). The Proposed SAC did not identify any
subsequent transfers made by Senator to any of the HSBC Defendants. Accordingly,
there are no pending subsequent transfer claims against the HSBC Defendants
emanating from original transfers by BLMIS to either Fund.
Second, the Amended Complaint alleged “Common Law Claims” against the
HSBC Defendants and others for unjust enrichment, aiding and abetting breach of
fiduciary duty and aiding and abetting fraud, with damages exceeding $6.6 billion. (Id.
at Counts 20-24). The Trustee asserted, in this regard, that the HSBC Defendants
“enabled Madoff’s Ponzi scheme by encouraging investment into an international
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network of feeder funds” and “aided, enabled, and sustained the massive Ponzi scheme
masterminded by Madoff in order to reap an extraordinary financial windfall.”
(Amended Complaint at ¶ 1.) However, the Second Circuit concluded that the Trustee
lacked standing to assert the Common Law Claims and similar claims asserted in other
proceedings. Picard v. JPMorgan Chase & Co. (In re BLMIS), 721 F.3d 54, 58 (2d Cir.
2013), cert. denied, 134 S. Ct. 2895 (2014).
C. 	The Funds’ Cross-Claims
The Funds answered the Amended Complaint on May 27, 2011 and amended
their answer on December 8, 2014. The latter pleading included twelve cross-claims. It
did not allege a basis for subject matter jurisdiction, see F ED. R. CIV. P. 8(a)(1), or
whether the cross-claims were core or non-core, and if non-core, whether the Funds
consented to the entry of a final judgment by the Court. See F ED. R. B ANKR. P. 7008.
The following table summarizes the twelve causes of action that comprise the Cross-
Claim:
C/A 	Title of Cause of
Action
Substance of Cause of Action
1 	Fraud (¶¶ 73-83) 	The HSBC Defendants misrepresented that they would
supervise each sub-custodian periodically to confirm that
they were discharging their obligations and protect the
Funds’ assets.
2 	Fraudulent
Concealment (¶¶
84-97)
The HSBC Defendants failed to disclose the true facts
learned from their due diligence and KPMG reports
which identified and made them aware of the red flags
surrounding Madoff and BLMIS.
3 	Negligent
Misrepresentation
(¶¶ 98-109)
The Sub-Custody Agreement created a fiduciary
relationship between the HSBC Defendants and Alpha
and Senator, and the HSBC Defendants continually
represented that they were conducting due diligence, and
despite the red flags, they falsely represented that their
due diligence revealed nothing of concern.
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4 	Breach of Fiduciary
Duty (¶¶ 110-27)
Alpha and Senator entrusted assets to the HSBC
Defendants, remained invested in BLMIS and lost over
$30 million through the Foreign Exchange Facility in
reliance upon their superior knowledge and paid them
substantial sums, but the HSBC Defendants breached
their fiduciary duty by failing to monitor and oversee
their investments with BLMIS, including the making of
misrepresentations and omissions relating to the safety
of their BLMIS investments.
5. 	Breach of Contract
(¶¶ 128-43)
The HSBC Defendants breached their contractual
obligations, including failing to monitor BLMIS and its
trading activities, failing to give notice prior to delegating
custodial functions to BLMIS, and failing to supervise
BLMIS’ performance of custodial obligations once
delegated.
6 	Gross Negligence
(¶¶ 144-50)
The HSBC Defendants relied on or failed to investigate
information, negligently failed to oversee and monitor
whether BLMIS held Alpha’s and Senator’s assets and
negligently relied on information provided by Madoff
notwithstanding the red flags, his consolidated role as
investment manager, custodian and execution agent and
the manifest incorrectness of the information he
supplied.
7 	Negligence (¶¶ 151-
56)
Same as the Sixth Cause of Action
8 	Unjust Enrichment
(¶¶ 157-61)
The HSBC Defendants received substantial fees for
purported custody and oversight of Alpha’s and Senator’s
assets as a result of which they remained invested in
BLMIS and lost over $30 million through the Foreign
Exchange Facility.
9 	Breach of
Luxembourg Law
(¶¶ 162-68)
HSSL’s appointment of BLMIS as sub-custodian created
a conflict of interest in violation of Luxembourg statutory
law.
10 	Breach of
Custodian
Agreements/Failure
to Comply with CIS
Regulations (¶¶
169-73)
HSSL breached the Custodian Agreements and the CIS
Regulations by failing to monitor BLMIS’ trading,
discover the various trading red flags or ask for
confirmation of deposits with BLMIS and by failing to
disclose the risks of BLMIS’ simultaneous roles as
broker-dealer/manager and custodian of Alpha’s and
Senator’s assets.
11 	Aiding and Abetting
Fraud (¶¶ 174-77)
HSBC Bank aided and abetted the HSBC Defendants’
fraud by utilizing KPMG and the KPMG reports to enable
the HSBC Defendants to misrepresent the adequacy of
the safeguards at BLMIS and the legitimacy of its
operations.
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12 	Aiding and Abetting
Breach of Fiduciary
Duty (¶¶ 178-82)
The HSBC Defendants’ aided and abetted BLMIS’ breach
of fiduciary duty by failing to inform Alpha and Senator
of the breaches of fiduciary duty by BLMIS and by
assuring that BLMIS was adequately safeguarding the
assets of Alpha and Senator.
D. 	The Funds’ Foreign Actions
Prior to asserting the cross-claims, Alpha had sued HSSL in the Luxembourg
District Court on October 20, 2009 for breach of contract and negligence in the
appointment of BLMIS as sub-custodian of Alpha’s assets (“Alpha Luxembourg
Action”). (See Declaration of François Kremer In Support of HSBC Defendants’
Motion to Dismiss the Amended Cross-Claims of Cross-Claimants Alpha Prime Fund
Limited and Senator Fund SPC, dated Feb. 17, 2015 at ¶ 5 (“Kremer Declaration”).) 10
Both parties have filed written submissions on the merits, and the matter is currently
stayed. (Id.)11
Senator also commenced an action against HSSL on December 4, 2014 in the
Luxembourg District Court seeking restitution of its securities or, alternatively, money
damages. (“Senator Luxembourg Action”). (Id. at ¶ 6.) Senator filed another action in
Luxembourg on April 30, 2015 seeking the same damages against HSBC Bank. (See
Supplemental Declaration of François Kremer In Support of HSBC Defendants’ Motion
10 	A copy of the Kremer Declaration is attached to the Moloney Declaration as Ex. 1.
11 	Counsel for the HSBC Defendants submitted a letter, dated Nov. 21, 2016 (ECF Doc. # 434)
advising the Court of a filing made by Alpha in the Alpha Luxembourg Action which moved the
proceeding “closer to trial posture.” (Id. at 1.) Counsel for Alpha replied by letter, dated Nov. 22, 2016
(ECF Doc. # 435) stating that Alpha’s submission was simply a “mandatory procedural step under
Luxembourg law needed to maintain the status quo.” (Id. at 1 (emphasis in original).)
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to Dismiss the Amended Cross-Claims of Cross-Claimants Alpha Prime Fund Limited
and Senator Fund SPC, dated May 8, 2015 at ¶ 11 (“Kremer Supp. Declaration”).) 12
Finally, Alpha filed a Writ of Execution on November 30, 2015 against the HSBC
Defendants in Bermuda in order to preserve the Bermuda statute of limitations.
According to the Funds, Alpha had until November 30, 2016 to file a full complaint in
Bermuda. (See Funds Opposition (defined below) at 1 n. 2.)
E. 	Senator’s Settlement With the Trustee
In late 2014, the Trustee reached a settlement with Senator. (Motion for Entry of
Order Pursuant to Section 105(a) of the Bankruptcy Code and Rules 2002 and 9019 of
the Federal Rules of Bankruptcy Procedure Approving a Settlement Agreement by and
Between the Trustee and Senator Fund SPC, dated Nov. 18, 2014 (“Senator Settlement
Motion”) (See ECF Doc. # 339).) Among other things, Senator received an allowed
customer claim of $238,753,482, agreed to pay the Trustee $95 million from the catch-
up distributions it was entitled to receive and agreed to share with the Trustee 50% of
the proceeds from any judgment it obtained through its cross-claims, the Senator
Luxembourg Action, and any other claims Senator brought against the HSBC
Defendants or related entities. (Settlement Agreement at ¶¶ 1, 2, 9.) 13 Upon the closing,
Senator and the Trustee would exchange mutual releases, (id. at ¶¶ 3, 4), and within five
days of the closing, the parties would submit a stipulation dismissing the Trustee’s
12 	A copy of the Kremer Supp. Declaration is attached as Ex. 6 to the Supplemental Attorney
Declaration of Thomas J. Moloney In Support of HSBC Defendants’ Motion to Dismiss, dated May 8,
2015 (ECF Doc. # 387).
13 	A copy of the Settlement Agreement is annexed to the Senator Settlement Motion as Exhibit A.
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claims against Senator with prejudice. (Id. at ¶ 6.) The Court approved the settlement
on December 17, 2014, (Order Pursuant to Section 105(a) of the Bankruptcy Code and
Rules 2002 and 9019 of the Federal Rules of Bankruptcy Procedure Approving a
Settlement Agreement by and Between the Trustee and Senator Fund SPC, dated Dec.
17, 2014 (ECF Doc. # 350)), and the stipulation of dismissal on January 23, 2015.
(Stipulation and Order for Voluntary Dismissal with Prejudice as To Senator Fund
SPC, dated Jan. 23, 2015 (ECF Doc. # 364).)
F. 	The HSBC Defendants’ Motion to Dismiss the Cross-Claim
The HSBC Motion seeks to dismiss the Cross-Claim on several grounds. First,
the Court lacks “related to” jurisdiction and should not exercise supplemental
jurisdiction, (id. at 8-14), and in the case of Senator, should enforce the Senator
Agreements pursuant to which the parties submitted to the exclusive jurisdiction of the
Luxembourg courts to resolve any disputes relating to the Senator Agreements. (Id. at
15-18.) Second, the Court should defer to pending suits in Luxembourg brought by
Alpha and Senator under principles of comity, (id. at 18-22), and forum non conveniens.
(Id. at 22-31.) Third, the Funds failed to make a prima facie showing that the Court has
personal jurisdiction. (Id. at 31-40.)
The Funds opposed the HSBC Motion. (See Memorandum of Law in Response
and Objection to [sic] Cross-Claim Plaintiffs Alpha Fund Limited and Senator Fund
SPC to the HSBC Defendants’ Motion to Dismiss the Amended Cross-Claims, dated Apr.
8, 2015 (“Funds Opposition”) (ECF Doc. # 379).) According to the Funds, the Court has
“related to” jurisdiction over the Cross-Claim because the same allegations are directly
relevant to the Funds’ “good faith” defense under 11 U.S.C. § 548(c) to the two-year
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fraudulent transfer claims and the equitable subordination claim (defined by the Funds
as the “Funds’ Defenses”). (Id. at 13.) Alternatively, the Funds argue that the Court may
exercise supplemental jurisdiction because the cross-claims “substantially overlap” with
the Trustee’s claims. (Id. at 18-23.) Next, the Funds assert that the forum non
conveniens factors weighed in favor of adjudicating the Cross-Claim in this Court. (Id.
at 23-35.) Finally, the Funds argue that the HSBC Defendants had sufficient contacts
with the United States to confer specific personal jurisdiction over them. (Id. at 35-40.)
The HSBC Defendants replied in further support of the HSBC Motion reiterating
their arguments for dismissal. (See Reply Memorandum of Law in Further Support of
the HSBC Defendants’ Motion to Dismiss the Amended Cross-Claims of Alpha Prime
Fund Limited and Senator Fund SPC, dated May 8, 2015 (“HSBC Reply”) (ECF Doc. #
388).) Following oral argument, the parties submitted several letters to the Court
supplementing their arguments. (See ECF Doc. ## 395, 401, 422, 423, 430, 431, 434,
435.)
DISCUSSION
When considering a motion to dismiss for lack of subject matter jurisdiction
under Rule 12(b)(1) of the Federal Rules of Civil Procedure, made applicable to
adversary proceedings pursuant to Rule 7012(b) of the Federal Rule of Bankruptcy
Procedure, the court must accept as true material factual allegations in the complaint
but need not draw inferences favorable to the plaintiff. J.S. v. Attica Cent. Sch., 386
F.3d 107, 110 (2d Cir. 2004), cert. denied, 544 U.S. 968 (2005); Shipping Fin. Servs.
Corp. v. Drakos, 140 F.3d 129, 131 (2d Cir. 1998). A court may consider materials
outside the pleadings to resolve jurisdictional disputes, but cannot rely on conclusory or
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hearsay evidence. J.S., 386 F.3d at 110; Zappia Middle E. Constr. Co. Ltd. v. Emirate of
Abu Dhabi, 215 F.3d 247, 253 (2d Cir. 2000). The party asserting jurisdiction bears the
burden of proof. Robinson v. Overseas Military Sales Corp., 21 F.3d 502, 507 (2d Cir.
1994).
The Funds assert that the Court may exercise “related to” jurisdiction over the
Cross-Claim pursuant to 11 U.S.C. § 1334(b) or, alternatively, supplemental jurisdiction
pursuant to 28 U.S.C. § 1367(a).
A. 	“Related to” Jurisdiction
Title 28, § 1334(b) grants the district court, inter alia, original but non-exclusive
jurisdiction over all civil proceedings related to cases under title 11. 14 “Related to” or
non-core proceedings are those whose outcome might have a “conceivable effect” on the
estate. Publicker Indus. Inc. v. United States (In re Cuyahoga Equip. Corp.), 980 F.2d
110, 114 (2d Cir.1992); Pacor, Inc. v. Higgins (In re Pacor, Inc.), 743 F.2d 984, 994 (3d
Cir.1984); overruled in part on other grounds by Things Remembered, Inc. v. Petrarca,
516 U.S. 124, 124–25 (1995). “An action is related to bankruptcy if the outcome could
alter the debtor’s rights, liabilities, options, or freedom of action (either positively or
negatively) and which in any way impacts upon the handling and administration of the
bankrupt estate.” Pacor, 743 F.2d at 994; accord Celotex Corp. v. Edwards, 514 U.S.
300, 308 n. 6 (1995); Parmalat Capital Fin. Ltd. v. Bank of Am. Corp., 639 F.3d 572,
14 	Title 28, § 157 authorizes the district court to refer its bankruptcy jurisdiction to the bankruptcy
court, and the United States District Court for the Southern District of New York has referred its
bankruptcy jurisdiction to this Court. Order, No. M 10-450 (S.D.N.Y. July 10, 1984), as amended by
Amended Standing Order of Reference, No. M 10-468, 12 Misc. 00032 (S.D.N.Y. Jan. 31, 2012). In
addition, as discussed in the next footnote, SIPA includes a separate grant of jurisdiction.
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579 (2d Cir. 2011).15 The Funds argue that the cross-claims are “related to” to the
BLMIS SIPA liquidation because the allegations supporting the cross-claims are the
same as those supporting the Funds’ Defenses, and the adjudication of the cross-claims
“will effectively decide the Funds’ defenses against the Trustee . . . .” (Funds Opposition
at 15.)
I disagree; the outcome of the cross-claims will not have any conceivable effect on
the BLMIS estate, and will not alter the BLMIS estate’s “rights, liabilities, options, or
freedom of action (either positively or negatively).” The Trustee is suing the Funds, or is
at least still suing Alpha, to recover initial fraudulent transfers and equitably
subordinate its SIPA customer claims. He also sued the HSBC Defendants to recover
subsequent transfers but those claims have been dismissed. Alpha and Senator, on the
other hand, are suing the HSBC Defendants for breach of contract, breach of fiduciary
duty, negligence, gross negligence, violations of Luxembourg law, aiding and abetting
and fraud based on the loss of their investments and the fees they paid. Their claims
15 	SIPA provides that bankruptcy courts will conduct liquidation proceedings, 15 U.S.C. §
78eee(b)(4), and the jurisdiction of bankruptcy courts in SIPA proceedings is akin to its jurisdiction of
cases under title 11. See 15 U.S.C. § 78eee(b)(2)(A) (A SIPA court “(i) shall have exclusive jurisdiction of
such debtor and its property wherever located . . .; (ii) shall have exclusive jurisdiction of any suit against
the trustee with respect to a liquidation proceeding; and (iii) except as inconsistent with [SIPA], shall have
the jurisdiction, powers and duties conferred upon a court of the United States having jurisdiction over
cases under title 11, together with such other jurisdiction, powers, and duties as are prescribed by this
chapter.”); accord SIPC v. Cheshier & Fuller, L.L.P. (In re Sunpoint Sec., Inc.), 262 B.R. 384, 392-95
(Bankr. E.D. Tex. 2001) (Bankruptcy Court may exercise “related to” jurisdiction under 15 U.S.C. §
78eee(b)(2)(A)(iii) over state law claims sounding in negligence, negligent misrepresentation, breach of
contract, and breach of warranty). I therefore reject the HSBC Defendants’ argument that this Court may
not exercise jurisdiction over “related to” proceedings in SIPA cases. (See HSBC Motion at 9-10; HSBC
Reply at 3 n. 2.)
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exist independent of the Trustee’s claims and win or lose, the outcome of the Cross-
Claim litigation will not affect the SIPA estate.
While there is some factual overlap regarding the issues of Alpha’s knowledge of
Madoff’s fraud and the HSBC Defendants’ performance of their duties as alleged in the
Cross-Claim, overlapping facts are relevant to supplemental jurisdiction, discussed
below, but do not create “related to” bankruptcy jurisdiction. Pacor, 743 F.2d at 994
(“[T]he mere fact that there may be common issues of fact between a civil proceeding
and a controversy involving the bankruptcy estate does not bring the matter within the
scope” of related to jurisdiction.). Moreover, the Funds admit that the outcome of the
cross-claims will not bind the Trustee under res judicata. (Funds Opposition at 15.)
The lack of any preclusive effect on the BLMIS estate’s claims further demonstrates that
the claims between third-parties are not “related to” the BLMIS liquidation. Pacor, 743
F.2d at 995 (noting that the bankruptcy estate was not affected by the third party action
between Pacor and Higgins because the debtor would not be precluded from relitigating
any issue in response to a claim asserted by Pacor against the estate).
Senator’s settlement, and its agreement to split the proceeds of Senator’s actions
against the HSBC Defendants, also do not support its assertion of “related to”
jurisdiction. It is “hornbook law . . . taught to first-year law students” that “the
jurisdiction of a court depends on the state of things at the time of the action brought,”
Grupo Dataflux v. Atlas Global Grp., L.P., 541 U.S. 567, 570-71 (2004) (quoting Mollan
v. Torrance, 9 Wheat. 537, 539 (1824)), although a plaintiff may be able to cure a
jurisdictional defect other than lack of diversity by filing an amended pleading which
then becomes the operative pleading for jurisdictional purposes. Northstar Fin.
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Advisors Inc. v. Schwab Invs., 779 F.3d 1036, 1043–48 (9th Cir.) (discussing use of
supplemental pleading after post-complaint assignment to cure defect in standing), cert.
denied, 136 S. Ct. 240 (2015). Senator (and Alpha) filed the Cross-Claim ‒ the operative
pleading ‒ on December 8, 2014, but the Court did not approve the settlement until
December 17, 2014, and the assignment of the proceeds did not become effective until
the closing sometime thereafter. Accordingly, the BLMIS estate lacked any interest in
the Senator cross-claims when they were asserted, and the post-filing assignment did
not cure the jurisdictional defect. 16
Senator’s principal authority, Savage & Assocs., P.C. v. Mandl (In re Teligent,
Inc.), 459 B.R. 190 (Bankr. S.D.N.Y. 2011), is distinguishable. There, a litigation trustee
(Savage) had entered into a post-judgment settlement agreement with Mandl, the
judgment-debtor, following a mediation. The settlement, which was approved by the
Court, required Mandl to bring a malpractice action against his former lawyers, and pay
50% of the net recovery to the Teligent estate (the “Proceeds Assignment”). Mandl
commenced the action in the District of Columbia, and the D.C. defendant asserted an
16 	Nor does the order approving the settlement with Senator supply a basis to exercise jurisdiction
over Senator’s cross-claims. The order provided that “this Court shall retain jurisdiction to hear and
determine all matters arising from or related to this Order.” The cross-claims did not arise from the
order, and while they arguably “related to” the order in the broadest sense, the order could not confer
subject matter jurisdiction over cross-claims that did not fall within the Court’s “related to” jurisdiction
granted under title 28. Binder v. Price Waterhouse & Co., LLP (In re Resorts Int'l, Inc.), 372 F.3d 154, 161
(3d Cir. 2004) (“Retention of jurisdiction provisions will be given effect, assuming there is bankruptcy
court jurisdiction. But neither the bankruptcy court nor the parties can write their own jurisdictional
ticket.”); accord Omega Corp. v. United States (In re Omega Corp.), 173 B.R. 830, 834 (Bankr. D. Conn.
1994) (“Even where the plan provides for a broad retention of jurisdiction, ‘a bankruptcy court obviously
cannot expand its subject matter jurisdiction beyond the jurisdiction grant provided in 28 U.S.C. §
1334.’”) (quoting United States Lines, Inc. v. Am. S.S. Owners Mut. Prot. and Indem. Ass'n Inc. (In re
United States Lines, Inc.), 169 B.R. 804, 816 (Bankr. S.D.N.Y. 1994)).
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affirmative defense that the Proceeds Assignment was unlawful. It also demanded the
blanket production of all mediation materials. Id. at 193-94.
Savage, who was not a party to the D.C. action, moved in this Court to block the
production and prevent the D.C. defendant from challenging the Proceeds Assignment.
She argued that the mediation materials were confidential under orders of this Court,
and the D.C. defendant was collaterally estopped from attacking the validity of the
Proceeds Assignment because it had received notice of the application to approve her
settlement with Mandl and had failed to object. The Court concluded that the D.C.
defendant was not collaterally estopped from challenging the validity of the Proceeds
Assignment in the D.C. litigation, but had failed to sustain its burden of showing that he
was entitled to a blanket lifting of the confidentiality provisions of the Court’s mediation
order. The D.C. defendant was nevertheless free to argue before the D.C. court that a
specific communication was not covered by the confidentiality provisions or that the
communication should nevertheless be disclosed pursuant to applicable law. The
District Court and Court of Appeals affirmed. Id. at 194.
Following the Second Circuit’s affirmance, the D.C. defendant again sought all
the mediation materials during discovery in the D.C. lawsuit. Savage thereupon moved
in this Court for certain injunctive relief the effect of which would have required the D.C.
defendant to seek any mediation materials in this Court. In addition, she contended
that this Court had exclusive jurisdiction to determine the validity of the Proceeds
Assignment, an affirmative defense in the D.C. action. Id. at 194-95.
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The Court rejected the jurisdictional argument. No one contested that the Court
had “related to” jurisdiction to decide the validity of the Proceeds Assignment because
the estate had a 50% interest in any recovery, but it did not have exclusive jurisdiction.
The D.C. court had concurrent jurisdiction to determine the D.C. defendant’s affirmative
defense, and the Court deferred to the D.C. court. Id. at 195-98. Importantly, the
jurisdictional question concerned the Court’s power to determine the validity of the
Proceeds Assignment, a component of a settlement that it had approved, and the
Teligent estate acquired its interest in the proceeds before Savage invoked this Court’s
jurisdiction to decide its validity and prevent the D.C. court from doing so.
The Teligent decision cited Balzotti v. RAD Invs., 273 B.R. 327 (D.N.H. 2002) in
support of its conclusion that the assignment gave the Court “related to” jurisdiction,
and Senator also relies on that case. There, the members of a chapter 11 debtor that
owned real estate found a purchaser for their interests and the real estate, but the buyer
defaulted. The bankruptcy court appointed a chapter 11 trustee, the members assigned
the first $200,000 of any recovery on their breach of contract claim to the trustee, and
the trustee and the members commenced an adversary proceeding against the buyers.
The trustee joined as a plaintiff only on the breach of contract claim. Id. at 329-30.
The bankruptcy court dismissed the adversary proceeding for lack of subject
matter jurisdiction, but the district court reversed. It ruled that the assignment of the
proceeds gave the bankruptcy estate a sufficient stake in the outcome to bring the
plaintiffs’ claims within the bankruptcy court’s “related to” jurisdiction, and rejected the
argument that the assignment was an improper or collusive attempt to invoke the
bankruptcy court’s jurisdiction in violation of 28 U.S.C. § 1359. Id. at 331. As in
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Teligent, the assignment occurred before the bankruptcy court’s jurisdiction was
invoked by the filing of the adversary proceeding.
Accordingly, the Court concludes that it lacks “related to” jurisdiction over the
Cross-Claim.
B. 	Supplemental Jurisdiction
Alternatively, the Funds argue that the Court may exercise supplemental
jurisdiction over the cross-claims. Pursuant to 28 U.S.C. § 1367(a), “in any civil action
of which the district courts have original jurisdiction, district courts shall have
supplemental jurisdiction over all other claims that are so related to claims in the action
within such original jurisdiction that they form part of the same case or controversy
under Article III of the United States Constitution.” 17 Claims are “part of the same case
or controversy” when they “derive from a common nucleus of operative fact,” Achtman
v. Kirby, McInerney & Squire, LLP, 464 F.3d 328, 335 (2d Cir. 2006) (quoting Promisel
v. First Am. Artificial Flowers Inc., 943 F.2d 251, 254 (2d Cir. 1991)), and “are such that
[the claimant] would ordinarily be expected to try them all in one judicial proceeding....”
Semi-Tech Litig. LLC v. Bankers Trust Co., 234 F. Supp. 2d 297, 300 (S.D.N.Y. 2002)
(quoting Promisel, 943 F.2d at 254).18
17 	The Second Circuit has ruled that bankruptcy courts may exercise supplemental jurisdiction. See
Klein v. Civale & Trovato, Inc. (In re Lionel Corp.), 29 F.3d 88, 92 (2d Cir. 1994).
18 	Curiously, the Funds answer denied the Court’s subject matter jurisdiction over the Trustee’s
claims, (compare Amended Complaint at ¶ 25 with Answer at ¶ 25), but now argue that the Court has
supplemental jurisdiction based on its original jurisdiction over the Trustee’s claims.
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A court that has supplemental jurisdiction may nevertheless decline in its
discretion to exercise it. Section 1367(c) states:
The district courts may decline to exercise supplemental jurisdiction over
a claim under subsection (a) if--
(1) the claim raises a novel or complex issue of State law,
(2) the claim substantially predominates over the claim or claims over
which the district court has original jurisdiction,
(3) the district court has dismissed all claims over which it has original
jurisdiction, or
(4) in exceptional circumstances, there are other compelling reasons for
declining jurisdiction.
The Funds argue that the facts underlying the cross-claims substantially overlap
with the Funds’ Defenses to the Trustee’s two-year fraudulent transfer and equitable
subordination claims. 19 (Funds Opposition at 18-19.) In the context of the two-year
fraudulent transfer claims, the question is whether the Funds wilfully blinded
themselves, and therefore, did not act in good faith within the meaning of 11 U.S.C. §
548(c) when they received the two-year transfers. 20 See SIPC V. BLMIS (In re BLMIS),
516 B.R. 18, 21 (S.D.N.Y. 2014) (lack of good faith requires a showing of willful
blindness). “Willful blindness” involves two elements, (1) belief that there is a high
probability that a fact exists, and (2) deliberate actions to avoid learning of that fact.
Global–Tech Appliances, Inc. v. SEB S. A., 563 U.S. 754, 769 (2011). Likewise, the
Trustee may “potentially subordinate [the Funds’ claims against BLMIS] by proving that
19 	The Funds do not contend that the cross-claims overlap with the Trustee’s six-year fraudulent
transfer claims despite the fact that the Trustee must demonstrate that the Funds had actual knowledge
that BLMIS was not trading securities to recover the transfers made during years three through six. See
SIPC v. BLMIS (In re BLMIS), No. 12 mc 115 (JSR), 2013 WL 1609154, at *4 (S.D.N.Y. Apr. 15, 2013).
20 	The entirety of the transfers the Trustee sought to avoid and recover from the Funds and the
subsequent transferees related to the withdrawal of principal. Thus, the Funds gave value for the
transfers within the meaning of 11 U.S.C. § 548(c).
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the [Funds] invested with [BLMIS] with knowledge, or in reckless disregard, of its
fraud.” Picard v. Katz, 462 B.R. 447, 456 (S.D.N.Y. 2011); accord Picard v. Merkin (In
re BLMIS), 515 B.R. 117, 158 (Bankr. S.D.N.Y. 2014). I refer to these generally as
knowledge issues. The overlapping knowledge issues in the Funds’ Defenses and their
cross-claims are whether the HSBC Defendants informed the Funds that BLMIS was a
Ponzi scheme, and possibly, whether the HSBC Defendants acquired knowledge they did
not pass on that might be imputable to the Funds.
The Court concludes that it lacked supplemental jurisdiction over the cross-
claims at the time they were asserted because the Trustee’s claims and the cross-claims
do not arise out of the same nucleus of facts. Semi-Tech illustrates why. There, the
plaintiff’s predecessor, Semi-Tech, issued certain notes pursuant to an indenture. The
plaintiff sued the indenture trustee for breach of fiduciary duty, and violation of the
Trust Indenture Act (the “TIA”), the former auditors for fraud, negligent
misrepresentation and malpractice, and certain former officers and directors of Semi–
Tech for breach of fiduciary duty, negligence, fraud and conspiracy to commit fraud.
234 F. Supp. 2d at 298. As summarized by District Judge Kaplan:
The complaint alleges a long series of transactions commencing in late
1995 and continuing into 1999 by which, plaintiff claims, Semi–Tech acted
dishonestly and/or imprudently and breached its obligations under the
indenture. It charges that [the indenture trustee] breached its obligations
to the note holders under the indenture and the TIA and its fiduciary
duties by failing to protect adequately the note holders against these
wrongs and by accepting deficient certificates from Semi–Tech officers
that purported to affirm compliance with various requirements under the
indenture agreement.
Id. at 299 (footnote omitted).
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Three outside directors residing in Canada moved to dismiss on several grounds
including lack of subject matter jurisdiction. The District Court rejected the plaintiff’s
contention that the claims against the movants were supported by supplemental
jurisdiction. After explaining the applicable standard for the exercise of supplemental
jurisdiction, id. at 300, the District Court contrasted the issues relating to the TIA claim,
over which it had original jurisdiction, and the claims against the movants. The TIA
claim was “exceedingly narrow,” alleging that the indenture trustee failed to examine
various officers’ and auditors’ certificates, accepted deficient certificates and failed to
warn the noteholders of the defaults. The TIA claim would be resolved by comparing
the certificates that were provided with the requirements of the TIA. Id. The claims
against the movants were much broader. Their resolution went to the “substance and
fairness of the allegedly dishonest or imprudent Semi–Tech transactions, the states of
mind and conduct of the directors, and other such issues that are irrelevant, or virtually
so, to the TIA claim against [the indenture trustee].” Id.
Here, the claims are raised by different parties, and like Semi-Tech, require
different proof. The Trustee’s claims against the Funds (and the HSBC Defendants) are
based on the damage to the customer property estate resulting from the money that the
Funds withdrew from BLMIS; the Funds’ claims against the HSBC Defendants are
primarily based on the damages they suffered because they left the rest of their money
in. The issues that must be decided to resolve the Trustee’s fraudulent transfer and
equitable subordination claims are relatively narrow and straightforward: (1) did the
Funds receive the transfers, which is easily proved through BLMIS’ bank records if there
is a dispute, and (2) did the Funds know that BLMIS was a Ponzi scheme.
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The issues raised by the cross-claims require different and far more extensive
proof. The Funds assert that the HSBC Defendants failed to adequately investigate and
monitor the Fund’s investments and BLMIS’ role as sub-custodian, made
misrepresentations, failed to warn the Funds and “were, or should have been, well aware
of the fraud surrounding BLMIS.” (Cross-Claim at ¶ 52.) Although there is some
overlap between the Funds’ knowledge and the HSBC Defendants’ activities, the
Trustee’s claims do not require the Court to decide whether the HSBC Defendants
“should have known” BLMIS was a Ponzi scheme or whether they committed the
numerous acts of malfeasance and nonfeasance alleged in the Cross-Claim.
Moreover, the parties’ various agreements raise a host of other issues that would
bear upon the HSBC Defendants’ liability on the cross-claims but have nothing to do
with the Trustee’s claims. For example, each Custodian and Administration Agreement
limits the HSBC contract party’s liability to acts involving fraud, gross negligence or
willful default, (Senator Custodian Agreement at § 15.7; Senator Administration
Agreement at § 8.2), and in Alpha’s case, dishonesty as well. (Alpha Custodian
Agreement at § 15(G); Alpha Administration Agreement at § 9(B).) In adjudicating the
cross-claims, the Court might have to distinguish between mere negligence and gross
negligence. That distinction, however, is immaterial to the claims asserted by the
Trustee. If the HSBC Defendants did not learn that BLMIS was a Ponzi scheme, it
doesn’t matter if they did their jobs poorly or not at all.
Finally, both Administration Agreements state that the Administrator may
provide similar services to other entities, and will not “be deemed to be affected with
notice of or to be under a duty to disclose to the Company . . . any fact or thing which
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may come to the knowledge of the Administrator . . . in the course of so doing or in any
manner whatever otherwise than in the course of carrying out the duties . . . hereunder.”
(Senator Administration Agreement at § 7(d); Alpha Administration Agreement at §
8(d).) The Cross-Claim alleges that HSSL knew or recklessly failed to know that BLMIS
could not have executed trades at the listed prices because HSSL administered up to ten
other funds where BLMIS acted as broker. (Cross-Claim at ¶ 44.) If HSSL learned
BLMIS was not actually trading securities in the course of performing administration
duties for one of these other funds, it would not have been required under the
Administration Agreements (assuming it had any duty to Alpha under the Alpha
Administration Agreement) to disclose that information to either of the Funds.
Accordingly, the Court lacks supplemental jurisdiction over the Cross-Claim.
But even if the Court could exercise supplemental jurisdiction, it would decline in
its discretion to do so. The decision not to exercise supplemental jurisdiction over the
Senator cross-claims is an obvious one. The Court has dismissed all of Trustee’s initial
transfer claims against Senator by agreement of the parties, and all of the subsequent
transfer claims against the HSBC Defendants although the Trustee never identified any
such claims involving initial transfers to Senator. Accordingly, all of the claims relating
to the Senator transfers over which the Court had original jurisdiction have been
dismissed. See 28 U.S.C. § 1367(c)(3). In addition, with the dismissal of the Senator-
related claims brought by the Trustee, the Senator cross-claims are the only remaining
claims involving Senator, and plainly predominate. See 28 U.S.C. § 1367(c)(2).
Furthermore, Senator and HSSL submitted to the exclusive jurisdiction of the
Luxembourg courts under the Senator Agreements to resolve any disputes relating to
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their terms. As a consequence, any disputes relating to the terms of the Senator
Agreements were improperly venued in this Court. 21 	See Phillips v. Audio Active Ltd.,
494 F.3d 378, 383-84 (2d Cir. 2007). Senator asserts that the mandatory forum
selection clause should not be enforced because HSSL engaged in fraud and
overreaching. It contends that it delegated its custodian duties to BLMIS without
Senator’s knowledge or authorization, and had Senator known that HSSL would not be
performing any of the duties under the Senator Custodian Agreement it would never
have signed the contract. (Funds Opposition at 29.)
The argument ignores the express terms of the Senator Custodian Agreement.
HSSL was permitted to delegate all of its duties to a sub-custodian and authorize the
sub-custodian to delegate all of its duties to a sub-sub-custodian. (Senator Custodian
Agreement at § 15.2) (“In performing its duties hereunder the Custodian may at the
expense of the Segregated Portfolio appoint such Correspondents as may be necessary to
perform in whole or in part any of the duties and discretions of the Custodian (including
in such appointment the powers of sub-delegation).” (emphasis added).)22 The only
limitation was that HSSL remained responsible for any acts or omissions of the sub-
custodian. (Id.)
Finally, Senator also commenced actions against HSSL in the Luxembourg
District Court seeking restitution of its securities or, alternatively, money damages, and
21 	The HSBC Defendants read the submission to jurisdiction broadly while Senator reads it
narrowly. The scope of the clause presents a question of Luxembourg law. Nevertheless, it is obvious that
many of the disputed issues, including the scope of HSSL’s duties and the limitations on its liability, relate
to the Senator Agreements.
22 	The term “Correspondents” includes “sub-custodians.” (Senator Custodian Agreement at § 1.1.)
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has filed a second action in Luxembourg against HSBC Bank seeking the same damages.
As discussed immediately below, the cross-claims involve novel and complex issues of
foreign law that are best decided by the foreign courts before whom similar claims are
currently pending.
The Trustee’s fraudulent transfer and equitable subordination claims remain
pending against Alpha although the subsequent transfer claims against the HSBC
Defendants have been dismissed. Nevertheless, the Court declines to exercise
supplemental jurisdiction over Alpha’s cross-claims for many of the same reasons as the
Senator cross-claims. A court may decline to exercise supplemental jurisdiction under §
1367(c)(1) over a claim that raises complex issues of foreign law. Carpenter Co. v. BASF
SE (In re Urethane Antitrust Litig.), 683 F. Supp. 2d 1214, 1221 (D. Kan. 2010)
(declining to exercise supplemental jurisdiction over complex, novel developing area of
European antitrust law); Empagran, S.A. v. F. Hoffman-La Roche Ltd., 453 F. Supp. 2d
1, 9-13 (D.D.C. 2006) (same); Mars Inc. v. Nippon Conlux Kabushiki-Kaisha, 825 F.
Supp. 73, 76 (D. Del. 1993) (declining to exercise supplemental jurisdiction over claim of
infringement of Japanese patent because “the principles embodied in [28 U.S.C. §
1367(c)(1)] are implicated by complex issues of foreign as well as state law”), aff’d, 24
F.3d 1368 (Fed. Cir. 1994).
The foreign law issues in this case may not seem complex at first glance, but they
are. Only three HSBC Defendants contracted directly with Alpha: HITSB (which
replaced Bank of Bermuda as the Custodian), HSSB (which replaced Bank of Bermuda
as the Administrator) and HSBC Bank, which entered into the foreign exchange facility,
overdraft facility and currency swap agreement. Each of the HSBC contract parties is a
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foreign entity, and their agreements with Alpha are governed by Bermuda law in the
case of the Alpha Agreements or the laws of England and Wales in the case of the HSBC
Bank agreements.
Alpha has nonetheless asserted contract-based claims against all of the HSBC
Defendants, including HSSL. As a result of the novations, Alpha contracted directly
with HITSB and HSSB. Alpha had no direct contractual relationship with HSSL.
While HITSB and HSSB may be vicariously liable for HSSL’s misdeeds under the Alpha
Custodian Agreement and the Alpha Administration Agreement, respectively, it is not
clear why HSSL is also liable to Alpha for breach of contract. Alpha has sued HSSL in
Luxembourg, and has obtained a Writ of Execution against the HSBC Defendants in
Bermuda. The Bermuda and Luxembourg courts are in better positions to determine if
Alpha can assert direct claims against HSSL and the other HSBC Defendants for the
Custodian’s or the Administrator’s breach of contract, whether HSSL violated
Luxembourg law, and whether the HSBC Defendants can invoke the limitations on
liability in the Alpha Agreements.
The non-contract claims also present difficult questions of foreign law. Alpha has
asserted claims for breach of fiduciary duty, negligence, gross negligence and fraud. It
has also asserted claims for aiding and abetting fraud and aiding and abetting breach of
fiduciary duty. These claims are primarily based on or derive from the same allegations
as the breach of contract claims; the HSBC Defendants failed to conduct due diligence,
failed to monitor Alpha’s investments with BLMIS, improperly retained BLMIS as sub-
custodian and failed to warn Alpha about the red flags indicating that Madoff was a
fraud. The separate existence of any fiduciary or other non-contractual duties, the
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aiding and abetting the breaches of those duties and the availability of the contract
defenses to the non-contract claims must be determined under foreign law.
But the unspoken issue of foreign law hinted at by Alpha (and Senator) is the
notion of joint and several liability. With the exception of claims based on violations of
Luxembourg law and aiding and abetting fraud, the Cross-Claim lumps all of the HSBC
Defendants together and implies that each is liable for the acts of every other HSBC
Defendant. HSBC Bank is the clearest example. HSBC Bank did not provide any
custodial or administration services to Alpha. It provided banking services. Yet Alpha
asserts that HSBC Bank along with the other HSBC Defendants is liable based on the
breach of contract, breach of fiduciary duty, tort and other claims arising from the
failure to investigate BLMIS or monitor trades, hiring BLMIS as a sub-custodian,
misrepresenting the safety of Alpha’s BLMIS investments or warning Alpha that BLMIS
was a fraud. Specifically, the Cross-Claim alleges that “the HSBC Defendants [including
HSBC Bank] delegated their responsibilities as custodians of Alpha Prime’s and Senator
Fund’s funds to Madoff and BLMIS without assuring and performing the proper
supervision they claimed to perform,” (Cross-Claim at ¶ 1), “intentionally concealed
from Alpha Prime and Senator Fund all the troubling information that their unique
access to Madoff and BLMIS provided, access based upon their foundational and much
trumpeted role in organizing and administering numerous Madoff investment ‘feeder
funds’ by which they directed billions of dollars into the coffers of BLMIS and earned
millions of dollars in fees,” (id.), “fraudulently and repeatedly represented to Alpha
Prime and Senator Fund that they were properly supervising BLMIS on multiple fronts,”
(id. at ¶ 2), and “crafted an elaborate electronic database accessible through the internet
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which they fed with various statistics on Madoff operations, creating the impression of
constant actual trading activity being conducted by BLMIS on behalf of Alpha Prime and
Senator, with the watchful supervision and control of that activity by the HSBC
Defendants.” (Id.) The Cross-Claim further asserts that the “HSBC Defendants
knowingly, intentionally and improperly failed to disclose the BLMIS Sub-Custody
Agreements and the New Customer Agreements to Alpha Prime or Senator Fund prior
to entering into these agreements,” (id. at ¶ 37), and although “the HSBC Defendants
delegated their responsibilities under the Custodian Agreement, the HSBC Defendants
remained ‘responsible to [Alpha Prime and Senator Fund] for any acts or omissions of
any … person howsoever appointed as if such acts or omissions were those of the
Custodian.’ Therefore, despite this delegation, the HSBC Defendants remained
contractually liable for the actions or inactions of BLMIS.” (Id. at ¶ 38.)
These allegations highlight the Funds unstated assumption that alter ego,
conspiracy or some other joint liability theory applies under the governing foreign law.
The notion of joint liability may or may not exist under Bermuda and/or Luxembourg
law, but even if it does, the elements of the claim may differ from domestic law. Given
the numerous and difficult issues of foreign law raised by the cross-claims, the Court
declines to exercise supplemental jurisdiction pursuant to 28 U.S.C. § 1367(c)(1).
In addition, I decline to exercise supplemental jurisdiction because the cross-
claims substantially predominate over the issues raised by the Trustee’s claims. See 28
U.S.C. § 1367(c)(2). “Where the state claims ‘constitute the real body of a case’ to which
federal claims are ‘an appendage,’ declining jurisdiction under this provision is
appropriate to prevent a situation wherein ‘permitting litigation of all claims in the
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district court can accurately be described as allowing a federal tail to wag what is in
substance a state dog.’” City of New Rochelle v. Town of Mamaroneck, 111 F. Supp. 2d
353, 371 (S.D.N.Y. 2000) (quoting State of New York v. Phillip Morris Inc., No. 97 Civ.
794 (LMM), 1998 WL 2574, at *2 (Jan. 5, 1998 S.D.N.Y. 1998) (in turn quoting Borough
of W. Mifflin v. Lancaster, 45 F.3d 780, 789 (3d Cir. 1995))). The same reasons that
support the conclusion that the Court lacks supplemental jurisdiction also lead to the
corollary that the issues raised by the Cross-Claim predominate. See, e.g., Semi-Tech,
234 F. Supp. 2d at 301 (The Court would decline to exercise supplemental jurisdiction,
even if it had it, because “[t]he factual and legal questions unique to the common law
claims against the moving defendants simply overwhelm any questions common to the
TIA claims against [the indenture trustee].”) (footnote omitted).
As discussed, the Trustee’s initial transfer claims are relatively straightforward.
The various knowledge tests in the Trustee’s direct case are subjective; the question is
what Alpha subjectively knew and not what it should have known. Even if the HSBC
Defendants’ knowledge can be imputed to Alpha, the question is the same: what did the
HSBC Defendants subjectively know? Whether the HSBC Defendants should have been
aware of BLMIS fraud, (see Cross-Claim at ¶ 52), is not relevant nor is their failure to
conduct due diligence of BLMIS or monitor Alpha’s investments. These breaches of
duty, whether contractual, tortious or statutory, will overwhelm the issues that the Court
must decide to resolve the Trustee’s initial transfer claims.
Accordingly, the Court concludes that it lacks subject matter jurisdiction over the
Cross-Claim under 28 U.S.C. § 1334 or supplemental jurisdiction under 28 U.S.C. §
1367(a), but to the extent that supplemental jurisdiction exists, the Court declines in its
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discretion to exercise it. In light of this conclusion, the Court does not reach the other
grounds for dismissal urged by the HSBC Defendants. Settle order on notice.
Dated: New York, New York
December 14, 2016
/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
United States Bankruptcy Judge
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