Rakoff Asked to Move 400 Madoff Suits as Deadline Passes

HSBC Holdings Plc, UniCredit SpA and Merrill Lynch joined more than 400 defendants in lawsuits brought by the liquidator of Bernard L. Madoff’s brokerage filing papers in the past week to beat a deadline for asking that their cases be moved to district court from bankruptcy court.

U.S. District Judge Jed S. Rakoff, who let the New York Mets owners move their dispute to his court, gave others sued by the Madoff trustee, Irving Picard, until the end of yesterday to request a transfer. He said district courts are the proper venue for some of the claims lodged by Picard because they don’t involve only bankruptcy law.

The transfer of cases may undercut U.S. Bankruptcy Judge Burton Lifland’s power to reverse some fraudulent transfers and limit Picard’s ability to collect money to pay victims of Madoff’s $52 billion Ponzi scheme, the largest in U.S. history. In the Mets case, the parties settled after Rakoff made principal harder for Picard to take back and limited the recoverable profits, cutting the trustee’s permitted demands by almost two-thirds to $386 million from $1 billion.

“For Picard, this is a serious blow” in handling Madoff cases, Chip Bowles, a bankruptcy lawyer with Bingham Greenebaum Doll LLP in Louisville, Kentucky, said of the Mets ruling. Amanda Remus, a spokeswoman for Picard, didn’t immediately respond to an e-mail seeking comment on Rakoff’s impact on Madoff suits.

‘Perverting’ the Law

Rakoff, who with U.S. District Judge Colleen McMahon has tossed $90 billion of Picard’s claims, set his deadline for new applications in early March. At the time, more than 400 defendants had tried to move their cases from bankruptcy court, mostly to Rakoff, according to a March 5 bankruptcy court order.

Rakoff by then had about 280 Mets-related cases to review. Just since March 27, more than 400 new requests were filed in court. Among defendants were Koch Industries Inc., the company run by billionaire brothers Charles and David Koch, and Mark Madoff’s widow, Stephanie.

Picard has said people and companies he sued are “eviscerating” the bankruptcy court and “perverting” the law by rushing to find new judges for their cases. They seek an “escape hatch” from bankruptcy court, which Congress intended to handle cases involving clawbacks of money withdrawn from a Ponzi scheme, the trustee said in an October filing in U.S. Bankruptcy Court in Manhattan.

“With the floodgates fully flung open, more and more parties are blatantly engaging in forum shopping,” Picard said.

Second Look

HSBC, based in London, and UniCredit, based in Milan, applied to Rakoff a second time after he deleted Picard’s biggest demands for money and sent their cases back to bankruptcy court. They merited a second look because Rakoff changed the rules about Ponzi transfers in handling the Mets suit, the banks said last week in district court filings.

Rakoff said in the Mets ruling that Picard can sue for two years’ of Ponzi profit, not six, and can’t take back principal if the defendants can prove they acted in good faith.

“My guess is, to the extent Judge Rakoff has the Madoff cases, he’ll rule consistently with his previous limits,” Nancy Rapoport, a bankruptcy law professor at the University of Nevada, Las Vegas, said in an e-mail. “In any other court, it’s still an open question.”

District judges are reexamining the way bankruptcy trustees use the law since the Anna Nicole Smith case, when the U.S. Supreme Court in June described limits to bankruptcy judges’ power. That stopped the former Playboy model’s heirs from collecting $449 million from Texas billionaire J. Howard Marshall’s estate and put district judges in control of more bankruptcy issues.

Brokerage Cases

Rakoff’s ruling on taking back two years of profit applies only to cases involving a brokerage such as Madoff’s, so bankruptcy trustees will continue to sue for six years of profit in other cases, said Peter Henning, a former Securities and Exchange Commission lawyer who teaches at Wayne State University in Detroit. He predicted that Picard will seek an opportunity to appeal the two-year ruling relating to brokerages as well.

“Strictly speaking, one district judge’s bankruptcy decision does not bind another district judge,” even in the New York district where Rakoff has his court, said Stephen Lubben, a bankruptcy law professor at Seton Hall University in Newark, New Jersey. If the judges disagree, an appeals court will have to resolve the issue, he said in an e-mail.

When asked to review a Picard case, Rakoff considers the request, then decides if he will remove the case from bankruptcy court and what aspects he will rule on, explaining his reasoning in a written opinion.

Maxam Capital

Rakoff told Maxam Capital Management LLC and founder Sandra Manzke on March 14 that he would take their case to decide Picard’s rights and obligations under non-bankruptcy law. Picard demanded almost $100 million of principal invested in the Ponzi scheme by Maxam, which said it lost $215 million on its investments.

Picard filed more than 1,050 lawsuits to recoup $100 billion he alleges was stolen from the confidence man’s other customers. He often accused parties of ignoring “red flags” warning of fraud. Rakoff told him that wasn’t enough to recoup money they invested -- there must be proof of bad faith.

Picard, who has charged $273 million for his firm’s Madoff work, is appealing the district court decisions that knocked out $90 billion of his claims against banks. Madoff is in jail, serving a 150-year sentence for fraud.

The Mets case is Picard v. Katz, 11-cv-03605, U.S. District Court, Southern District of New York (Manhattan).

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