July 2 (Bloomberg) -- The trustee liquidating Bernard Madoff’s defunct brokerage won court approval to reject the con man’s lease for three floors of midtown Manhattan’s “Lipstick” building, freeing up more funds to pay back fraud victims.

The right to cancel the 1986 lease for the elliptical building’s 17th through 19th floors was approved yesterday by U.S. Bankruptcy Judge Burton Lifland in New York. The order lets trustee Irving Picard stop paying rent before the contract’s January 2012 expiration.

Under a deal with the landlord, Picard will continue to pay rent on the 17th floor until it’s vacated by the Federal Bureau of Investigation, which plans to continue using the location for another year as part of its probe of Madoff’s firm. Muriel Siebert & Co., which is subleasing more than half of that floor from Madoff, will also remain, according to a court filing.

Under the same deal, Picard will continue to pay rent for the 19th floor for six months while the landlord, Metropolitan 885 Third Avenue Leasehold LLC, seeks to rent the space. Picard will have control of that floor for the next two months while he gathers records and disposes of assets, according to the filing.

“It would have been extremely difficult to locate a party willing to take on the 885 lease for a short period, especially at the above-market rates,” Picard said in the filing.

Under his agreement with the landlord, the 18th floor will continue to be occupied by Surge Trading Inc., which outbid two other firms to buy Madoff’s market-making business. The lease rejection is effective June 30.

Bernard L. Madoff Investment Securities LLC occupied the floors while Madoff ran a $65 billion fraud. Madoff, 71, was sentenced this week to 150 years in prison for using money from new clients to pay earlier investors in the biggest Ponzi scheme in U.S. history.

Picard is compiling Madoff’s assets and suing the con man’s biggest investors to help repay victims.

The case is In re Bernard L. Madoff, 09-11893, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Erik Larson in New York at elarson4@bloomberg.net.

Last Updated: July 2, 2009 11:44 EDT