Madoff case: Claw-Back Claim

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1. Decision of the Federal Tribunal of 21 February 2012

The question as to whether a bank may object to the restitution of a client’s assets within the context of the proceedings started in the US in the Bernard L. Madoff matter had led to a decision of the Federal tribunal dated 22 February 2012 (1). In that matter a bank which had been sued in the US by the Trustee of BLMIS was confronted with one of its clients; the dispute was however limited to the question as to whether an order in a “clear cut case” proceedings could be rendered, i.e. in a situation where the facts are undisputed or the legal situation is clear (art. 257 CPC). The Federal tribunal decided that the matter was not a clear cut one: the argument according to which no obligation existed yet on the part of the bank was not relevant for the disputed claim already existed and encumbered the bank’s assets; while the return on the investment was credited on the client’s account, among others, one question was whether the client was unjustly enriched.

2. Decision of the Patrimonial Chamber of the Canton of Vaud of 1st May 2014

The Patrimonial Chamber of the canton of Vaud handed down a judgment on 1st May 2014 in a matter where the bank had not yet been sued in the US (2). The bank had made investments in the funds managed by Bernard L. Madoff Investment Securities LLC (“BLIMS”) for the account of its clients. As the units in the feeders funds had been redeemed and the related amounts credited on the client’s account, the bank remained exposed to claw back claims as well as to proceedings against the “subsequent transferee”. The bank objected to the clients’ claim for restitution and was then sued by the client. The Patrimonial Chamber held that the bank had a right of pledge. The decision was challenged and is now pending before the Canton of Vaud Court of Appeal. The first instance decision is therefore not a final judgment. Nonetheless it contains a first stance in the matters concerning relationships between banks and their clients with regards to the investments in the funds managed by BLIMS.

The client argued that the obligation did not already exist and that the alleged risk, should it materialise, would not give rise to any obligation as the reimbursements had been made over two years after the bankruptcy of BLIMS in December 2008. The bank notably alleged its right to be released from obligations entered into for the principal’s account (art. 402 al. 1 in fine CO), the principal’s obligation to provide either the necessary amounts or securities, as well as the existence of a right of pledge.

The cantonal Patrimonial Chamber first examined whether the bank had a pledge over its client’s assets. The object of the pledge, which extended to all assets and rights held directly or indirectly by the bank, was sufficiently determined at the time of granting the right of pledge. The pledged claim, which covered all debts and obligations, present or future, resulting from the business relationship could be determined as it resulted from the management of a specified account. The Patrimonial Chamber thus held that a right of pledge in favour of the bank existed.

The cantonal Patrimonial Chamber then examined whether the lien was (or was not) extinguished. The client argued that its debt had to exist at the time of exercise of the right of pledge and that, as said debt did not exist at the time the bank objected to the client’s reimbursement request, the right of pledge did not exist either. The bank pleaded that it did not exercise its right of pledge within the meaning of art. 891 al. 1 CC but only objected to the return of the assets.

The cantonal Patrimonial Chamber ruled that art. 891 CC only governed the effects of the right of pledge whereas articles 888 and 889 CC governed its extinction. The question whether and when the creditor-pledgee is bound to return the assets, respectively whether it may keep said assets is thus governed by article 889 al. 1 CC. Following scholars, the Patrimonial Chamber held that the assets subject to a pledge must only be returned, in the case of future claims, if it has been established that the claim will not arise. The evidence allowed to conclude that the bank is exposed to (future) proceedings; conversely, the client had not demonstrated that its debt would in no event materialise.

Thus, the Patrimonial Chamber ruled that given the existence of a right of pledge on existing or future debts deriving from a business relationship, the bank had a valid right of pledge allowing it to block the client’s account in order to guarantee all claims/debts deriving from the business relationship including those which were not then due notwithstanding the fact that the bank had not yet been sued by the Trustee of BLMIS or the liquidators of the feeder funds.

(1) Decision of the Federal Tribunal N° 4A_443/2011 dated 22 February 2012
(2) Decision of the Patrimonial Chamber of 1st May 2014, case number PT11.021751

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