Bankruptcy Judges Can’t Hear Madoff Suits, Defendants Say

Bankruptcy judges can’t rule or recommend rulings on so-called fraudulent-transfer suits by the liquidator of Bernard L. Madoff’s brokerage under the U.S. Constitution, defendants said in a brief to U.S. District Judge Jed S. Rakoff in New York.

Suits that aim to “augment” a bankrupt firm’s estate are based on common-law claims and by law require a ruling by a district judge, they said yesterday in the filing.

Rakoff ruled in May, in a case involving the Refco litigation trust, that bankruptcy judges don’t have power to make final rulings on claims for fraudulent transfers and unjust enrichment. His law clerk sent the decision, which cited a U.S. Supreme Court ruling in the Anna Nicole Smith case, to lawyers for the Madoff trustee and defendants in related lawsuits, according to an e-mail obtained by Bloomberg. Bankruptcy judges can issue reports and recommendations to district judges, Rakoff said in the Refco opinion.

Picard, who has filed more than 1,000 lawsuits, continues to sue investors to claw back Ponzi funds. Rakoff was wrong to rule that bankruptcy judges can make recommendations on how such cases should be handled, the Madoff defendants said yesterday.

“To the contrary, Congress considered and rejected bankruptcy judges serving as magistrates, who would issue reports and recommendations, subject to full de novo review” by a district judge, they said.

‘Most Significant’

They also faulted Picard’s argument that the Madoff bankruptcy judge had the best experience to handle the clawback cases.

“This court, by contrast, has brought one of the most significant recovery actions, the Katz case, almost to trial,” setting the shape of “governing law,” they said, referring to Rakoff’s rulings in the New York Mets owners case.

Hundreds of Madoff defendants asked Rakoff to move their cases from bankruptcy court to district court based on the Smith ruling, which stopped the former Playboy model’s heirs from collecting millions of dollars from Texas billionaire J. Howard Marshall’s estate and put district judges in control of more bankruptcy issues.

The transfer of cases has undercut U.S. Bankruptcy Judge Burton Lifland’s power to reverse some fraudulent transfers and limited trustee Irving Picard’s ability to collect money to pay victims of Madoff’s $52 billion Ponzi scheme, the largest in U.S. history.

Mets Owners

Rakoff, who let the New York Mets owners move their dispute with the Madoff liquidator to his court, received more than 400 requests during the week ended April 2 from companies sued by Picard. Those seeking to move cases included HSBC Holdings Plc, UniCredit SpA and Merrill Lynch, as well as former spouses of Madoff’s sons.

Rakoff will hold a hearing on June 18 to rule on how more than 300 of Picard’s suits should be handled in light of the Smith case, titled Stern v. Marshall.

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.

Rakoff, with U.S. District Judge Colleen McMahon, has thrown out $90 billion of Picard’s claims against banks. Picard, who has charged about $270 million for his firm’s Madoff work, is appealing rulings related to about $30 billion of the claims. Madoff is serving a 150-year prison sentence.

The Rakoff opinion in the Refco case is Mark S. Kirschner, trustee of the Refco Litigation Trust v. John D. Aboglia, 11-cv-8250, U.S. District Court, Southern District of New York (Manhattan.)

The Rakoff docket for Picard’s suits is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC 12-mc-0115, U.S. District Court, Southern District of New York (Manhattan).

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