Madoff Son Must Face Suit in Bankruptcy Court

Bernard Madoff’s son Andrew must submit to a bankruptcy judge’s decision to permit a $198 million lawsuit to go forward because he sought that court’s protection when he filed a claim against his father’s estate, a federal judge said.

U.S. District Judge William Pauley in Manhattan last week declined to hear an appeal of the September decision in favor of Irving Picard, the trustee liquidating Bernard L. Madoff Investment Securities LLC, in his claim against Madoff family members including Andrew Madoff and the estate of Mark Madoff, who committed suicide in December 2010. Pauley’s written opinion was filed today in U.S. Bankruptcy Court in Manhattan.

“Because Mark and Andrew invoked the aid of the bankruptcy court by offering a proof of claim and demanding its allowance, they must abide by the consequences of that procedure,” Pauley said in his Dec. 22 decision, citing a U.S. Supreme Court ruling that also described limits to the power of bankruptcy judges. “There is no basis for them to insist that the issue be resolved” by a higher court, Pauley said.

Andrew Madoff asked Pauley in October to allow an appeal. In court papers filed in his own behalf and as executor of his late brother’s estate, he said the judge’s decision would result in a “massive expansion of liability” for managers of banks and large corporations for the wrongs of individual units.

Martin Flumenbaum, a lawyer for Andrew Madoff and Mark Madoff’s estate, said Pauley’s decision to return the case to bankruptcy court “is a procedural issue and has no bearing on the merits of the dispute.”

‘Without Merit’

Picard’s lawsuit is “wholly without merit,” Flumenbaum said in an e-mail today. “Mark and Andrew Madoff had no prior knowledge of Bernard Madoff’s crimes and contacted the U.S. Department of Justice and the SEC immediately after their father told them he had defrauded his investment advisory clients.”

U.S. District Judge Jed Rakoff took a different view from Pauley last month when he began reviewing five so-called clawback lawsuits brought by Picard. Rakoff faulted Picard for trying to keep the cases in bankruptcy court on the basis that the defendants had filed claims against the estate, saying that district judges have a “statutory obligation” to withdraw suits that require consideration of non-bankruptcy law.

Suing the Madoffs in 2009, Picard claimed the con man’s family used the firm as their “family piggy bank” and should be forced to turn over the money to victims of Madoff’s Ponzi scheme. He sued Mark and Andrew Madoff, as well as Bernard Madoff’s brother Peter Madoff and his niece, Shana Madoff Swanson. All the defendants held senior positions at the Madoff firm.

Burton Lifland

Picard claimed that the defendants failed to stop Madoff’s fraud and instead chose to profit from it. In the September ruling, U.S. Bankruptcy Judge Burton Lifland ruled that Picard could pursue most of his claims against the Madoffs and gave him the opportunity to amend his complaint.

Picard, who increased the amount of money he sought in an amendment, asked Lifland yesterday to let him change the suit again, according to a court filing.

Madoff, 73, who pleaded guilty to charges of masterminding the biggest Ponzi scheme in history, is serving a 150-year term in a federal prison in North Carolina.

The case is Picard v. Estate of Mark Madoff, 11-Misc-379, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Linda Sandler in New York at lsandler@bloomberg.net; Bob Van Voris in New York at rvanvoris@bloomberg.net

To contact the editor responsible for this story: Stephen Farr at sfarr@bloomberg.net

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Andrew Madoff

Andrew Madoff. Photograph: CBS via Getty Images

Andrew Madoff. Photograph: CBS via Getty Images