Bankruptcy Judge’s Power Limited in Madoff Transfer Suits

The bankruptcy judge overseeing Bernard Madoff’s liquidation can hear lawsuits the trustee brought against customers over fraudulent transfers and submit proposed rulings to a higher court, a federal judge ruled.

The decision by U.S. District Judge Jed Rakoff is a defeat for Madoff defendants in more than 300 lawsuits, who had asked him to take the suits away from U.S. Bankruptcy Judge Burton Lifland in light of a 2011 decision from the U.S. Supreme Court in a case called Stern v. Marshall.

“Efficiency” will be improved by having recommendations from a bankruptcy judge who has “both intimate familiarity with the underlying liquidation and substantial expertise in the bankruptcy law,” Rakoff said in the 22-page opinion.

Trustee Irving Picard sued the customers, saying they received fraudulent transfers because they withdrew more cash from their accounts at Bernard L. Madoff Investment Securities LLC than they invested. Rakoff still may take those suits away from Lifland, depending on how he rules in an another case.

In the Stern case, the Supreme Court found that some types of state-law claims cannot be decided finally in bankruptcy court. The U.S. Constitution allows only life-tenured district judges to make final rulings in those situations.

Since Stern was handed down, Rakoff said the consensus among federal district judges in New York is to allow bankruptcy judges to issue recommended rulings in fraudulent-transfer suits.

Undecided Question

Rakoff rejected Picard’s argument that Lifland should be allowed to make final fraud rulings in the Madoff case because it’s a liquidation under the Securities Investor Protection Act, not an ordinary bankruptcy.

Rakoff, who heard oral arguments in June, sent the hundreds of suits back to Lifland while leaving one question undecided. The answer might free customers from Lifland’s oversight.

Multiple customers argued in a separate dispute before Rakoff that a section of the Bankruptcy Code doesn’t apply in SIPA cases. That section allows a bankruptcy trustee to deny a claim so long as the creditor is a defendant in a lawsuit.

If Rakoff decides that the section doesn’t apply to the Madoff liquidation, Lifland won’t be allowed to make even recommended rulings.

The Madoff firm began liquidating in December 2008 with Picard’s appointment under SIPA. Madoff is serving a 150-year prison sentence following a guilty plea.

The fraudulent transfer opinion was part of Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 12-mc-00115, U.S. District Court, Southern District of New York (Manhattan). The Madoff liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities Inc., 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The criminal case is U.S. v. Madoff, 09-cr-00213, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Bill Rochelle in New York at wrochelle@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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