April 20 (Bloomberg) -- Competing orders from two federal judges on recovering Bernard Madoff’s assets for victims could lead to costly court battles over who’s in charge, the convicted money manager’s lawyer says.

U.S. District Judge Denny Chin, presiding over Madoff’s criminal case, today blocked him and his wife Ruth from disposing of assets including homes, investments, boats and business ventures. Separately, U.S. Bankruptcy Judge Burton Lifland put Madoff’s assets under the control of a court- appointed trustee in an attempt to coordinate their collection and distribution to victims of his $65 billion Ponzi scheme.

Lifland said at a hearing today efforts to corral Madoff’s assets for the benefit of victims have been “disjointed.” The appointment of an interim trustee to control Madoff’s money and make sure it is preserved was requested by a group of the convicted money manager’s clients who are seeking to force Madoff into personal bankruptcy.

“We are concerned that the appointment of such a trustee will result in a contentious, costly and time-consuming litigation in different courts involving identical assets,” Madoff’s lawyer, Ira Sorkin, said in a letter addressed to Chin and Lifland and filed in court today.

Assistant U.S. Attorney Barbara Ward said in an April 17 legal brief made public today that Madoff‘s property should be frozen by the criminal judge so it isn’t in the bankruptcy estate. Chin’s order followed the U.S. Attorney’s filing.

‘Totally Mystified’

“I’m totally mystified” why the U.S. Attorney is taking the stance the assets shouldn’t be dealt with in bankruptcy court, said Matthew Gluck, a Milberg LLP attorney representing the Madoff victims who filed the involuntary bankruptcy case against him April 13. Gluck declined to speculate on which court order will take priority.

Attorney Larry McMichael, who’s not involved in the case, said Madoff property is subject to forfeiture in the criminal case if prosecutors show it’s traceable to the Ponzi scheme. As the government is presenting evidence to Chin, Lifland may empower the trustee to sell the property, he said. Were that to occur, Chin may then take control of the bankruptcy case, he said.

“If it’s a conflict between the bankruptcy judge and the district judge, the district judge is going to win,” said McMichael, who is with Dilworth Paxson in Philadelphia.

Bernard Madoff pleaded guilty on March 12 to defrauding investors by using money from new ones to pay off old ones in a massive Ponzi scheme. Before the fraud came to light, Madoff told investors they had $65 billion in his firm’s accounts, prosecutors said. Madoff, 70, is in custody awaiting sentencing in June. He faces as many as 150 years in prison.

Yacht Called ‘Bull’

Prosecutors have identified more than $100 million in real estate, cash, bonds, art, autos, boats and other assets owned by Madoff and his wife, which the government said it intends to seize. The couple’s residence in Palm Beach, Florida, a yacht called “Bull” and a smaller boat have been seized by the U.S. Marshals Service.

The Madoffs may not “transfer, sell, assign, pledge” or otherwise dispose of their property, Chin said in his ruling made public today.

Yusill Scribner, a spokeswoman for Acting U.S. Attorney Lev Dassin, didn’t have an immediate comment on who was now controlling Madoff’s property. Like the bankruptcy trustee, prosecutors have said they intend to distribute Madoff property they seize to his investors.

‘Maximize Recovery’

Ward, the assistant prosecutor, said Madoff’s property should be restrained “in order to maximize recovery for victims.” She also said the Madoff assets should be “restrained to make clear that the property is subject to criminal forfeiture” and “is not part of the estate in the involuntary petition just filed against Madoff in bankruptcy court.”

Lifland’s decision to appoint a trustee came over the opposition of Sorkin, who said another trustee would only add complexity. He said in the letter to Lifland and Chin that Ruth Madoff will claim she owns some assets “free and clear of any wrongdoing” by her husband and the dispute may lead to “litigation involving many parties at different times in several courts over the same assets.”

‘Turf War’

Lifland said he didn’t want to see “a turf war” among the various agencies that are working to recover assets. Sorkin said Madoff will fight the involuntary bankruptcy petition.

Gluck told Lifland a trustee was needed immediately. He noted that creditors have gotten liens from a Connecticut judge on Madoff’s assets, that the government is seeking forfeitures, that Madoff assets have been seized in France, and that Madoff’s U.K. unit has filed for Chapter 15 bankruptcy in Florida.

Among the assets now subject to Chin’s retraining order are Madoff interests in more than a dozen businesses and partnerships, including restaurants and real estate funds associated with New York Mets baseball team owner Fred Wilpon.

Also included are the Madoffs’ $7 million Upper East Side apartment in Manhattan and homes in Montauk, New York, and France. Chin’s order covers Madoff cars and yachts, and more than $30 million in loans owed to the Madoffs by their sons. Also included are $17 million in cash and $45 million in bonds in accounts in Ruth Madoff’s name -- assets that she has previously said are “unrelated” to her husband’s scheme.

Trustee Picard

Separately, the Securities Investor Protection Corp., a government-backed firm that covers losses when brokerages fail, is working to recover assets of Madoff’s firm, Bernard L. Madoff Investment Securities LLC. SIPC trustee Irving Picard is responsible for conducting a broad investigation of Madoff’s assets and actions and has said he has already recovered about $1 billion to repay Madoff clients.

Marc Hirschfield, an attorney for Picard, didn’t take a position on whether Lifland should appoint an interim bankruptcy trustee and declined to comment on Chin’s decision.

The bankruptcy case is Bernard L. Madoff, 09-11893; The SIPC case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The SEC case is SEC v. Madoff, 08-cv-10791, U.S. District Court for the Southern District of New York (Manhattan).

To contact the reporters on this story: David Glovin in New York federal court at dglovin@bloomberg.net.

Last Updated: April 20, 2009 18:16 EDT