Federal Court: Judge Had Power to Block Madoff Claims

, New York Law Journal


A bankruptcy judge had the authority to block private plaintiffs from suing the estate of Jeffry Picower in the Bernard Madoff Ponzi scheme because their claims were derivative to those brought by a trustee working to recover money for all Madoff investors, a federal appeals court ruled Monday.

The U.S. Court of Appeals for the Second Circuit said the late Southern District Bankruptcy Judge Burton Lifland was right to halt two actions in Florida federal court which sought direct recovery from the Picower defendants and that the judge did not exceed the limitations on his authority under Article III of the United States Constitution.

Judges Jose Cabranes, Reena Raggi and Susan Carney made those rulings in In re: Bernard L. Madoff Investment Securities, 12-1645, the latest in a series of appeals where the court was asked to review liquidation proceedings for Bernard L. Madoff Investment Securities, (BLMIS), and the actions taken by BLMIS trustee Irving Picard as he tries to recover over $17.5 billion in principal lost by investors in the scheme.

Picower was considered to be the largest winner in the Ponzi scheme by withdrawing billions from BLMIS before its collapse in 2008. He was sued by Picard, the trustee overseeing liquidation of BLMIS under the Securities Investor Protection Act, (SIPA), in the bankruptcy court in 2009.

Picard alleged fraudulent conveyance—that the Picower defendants withdrew billions from BLMIS knowing they were profiting from Madoff's fraud.

Picower died later that year and Picard settled in 2010 with his estate, which agreed to return $5 billion to the BLMIS bankruptcy estate out of a $7.2 billion forfeiture it agreed to make to the U.S. Attorney's office.

All told, Picard, of BakerHostetler, has recovered about $9.7 billion, or 55.9 percent of the $17.5 billion he is chasing (NYLJ, Jan. 8).

Lifland, who passed away this Sunday, had issued an injunction barring all claims that were "derivative" of claims being pursued by Picard in his court.

There were two actions at issue in the appeal decided Monday by the Second Circuit.

One action, filed by claimant Susanne Stone Marshall, was brought on behalf of BLMIS account holders who either had not filed SIPA claims with Picard or had their claims denied.

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