Federal Court: Judge Had Power to Block Madoff Claims

, New York Law Journal

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The second action, brought by claimant Adele Fox, challenged Picard's method of calculating who the "net winners" were in the Ponzi scheme—those not entitled to any recovery because they were paid more than they invested.

Lifland enjoined the actions on May 3, 2010, saying they violated his protective order, usurped the automatic stay provision of the Bankruptcy Code and undermined his jurisdiction. Lifland then entered a permanent injunction on Jan. 12, 2011, when he approved the Picard-Picower settlement. Southern District Judge John Koeltl affirmed the decision in March 2012 and attorneys for Marshall and Fox appealed to the Second Circuit.

On their appeal, Marshall and Fox argued that their claims were non-derivative because the Picower defendants directly participated in stealing BLMIS customer funds.

But in the Second Circuit's opinion, Cabranes said the "respective Florida complaints echo those made by the Trustee," and were an impermissible attempt to "plead around" the Lifland injunction. He said their alleged injuries are "inseparable from, and predicated upon, legal injury to the estate—namely, the Picower defendants' fraudulent withdrawals from their BLMIS accounts of what turned to be other BLMIS customers' funds."

Regardless of how they framed their claims, Cabranes said, their damages "still remain secondary harms flowing from" the Picower withdrawals.

The next question was on the limits of the court's power under Article III, where both Marshall and Fox argued there claims should be allowed because of the U.S. Supreme Court's decision in Stern v. Marshall, 131 S.Ct. 2594.

In Stern, widow Anna Nicole Smith filed a state law counterclaim in her Chapter 11 bankruptcy case to recover from her stepson for his alleged interference with the inheritance she expected from her late husband.

The Supreme Court, Cabranes said, invalidated the authority of bankruptcy judges to enter final judgments on claims and counterclaims that are based exclusively on legal rights guaranteed by state law.

Fox claimed the Stern decision meant that Lifland was improperly exercising powers reserved for Article III judges, but the court rejected the argument, with Cabranes saying that "appellants' purported tort claims are, in essence, disguised fraudulent transfer actions, which belong exclusively to the Trustee."

Marshall had argued that Lifland lacked the jurisdiction to enter a final judgment on Picard's fraudulent transfer action against the Picower defendants. But here, Cabranes said, the critical fact was that the Picower defendants had filed a proof of claim against the BLMIS estate.

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