Dec. 28 (Bloomberg) -- New York Attorney General Eric Schneiderman persuaded a federal judge to decide a dispute with the Bernard Madoff brokerage trustee over distributing a $415 million settlement with a Ponzi scheme investor to victims of the fraud.
U.S. District Judge Jed Rakoff in Manhattan said he was convinced the case, started in bankruptcy court by trustee Irving Picard, requires a ruling by a higher court “after carefully considering the parties’ written submissions and oral argument,” according to an order filed today.
Schneiderman in June agreed to settle a state lawsuit against the former Madoff investor, J. Ezra Merkin, by allotting most of the settlement money to investors in Merkin’s hedge funds and the rest to the state. Picard responded by suing Schneiderman in bankruptcy court to stop him from completing the deal, saying it obstructs his own efforts to collect $500 million from Merkin and his funds for a different group of investors.
Picard has said that under bankruptcy law he has sole right to sue former Madoff investors who allegedly knew of the fraud, and decide who gets the money. Rakoff has knocked tens of billions of dollars off of Picard’s claims through rulings on his rights as trustee and liquidator of the con man’s estate.
Asking Rakoff to take this case, New York’s highest law enforcement official argued that Picard hadn’t established a legal claim to any of Merkin’s assets.
It would be “unprecedented” for a bankruptcy court to stop the settlement of claims by a state law enforcement agency, “on the ground that the settlement might make it difficult for the trustee to collect a judgment he hopes to obtain someday,” Schneiderman said in court filings.
“We are pleased with the judge’s decision,” said James Freedland, a spokesman for the attorney general. Amanda Remus, a Picard spokeswoman, didn’t immediately respond to an e-mail seeking comment.
Picard’s suit against Schneiderman is one of two similar court fights that set the trustee against a state attorney general. Picard was ordered into mediation after suing California Attorney General Kamala Harris, alleging her $270 million lawsuit against a former Madoff investor’s estate interfered with his collection of assets, and would help only Californians.
Both attorneys general portray their fight with Picard in court filings as a clash between federal bankruptcy law, which describes a trustee’s powers in fraud cases, and state law governing their right to bring similar cases against investors who funneled money to the Madoff Ponzi scheme.
According to Schneiderman, Picard is interfering with the attorney general’s power to enforce New York’s Martin Act and other legal rights of the people of the state. Since 2009, Picard has “made intermittent efforts to intimidate” New York’s attorneys general, threatening to sue to make them turn over any funds taken from Merkin, Schneiderman said in a September filing.
Removing the case from bankruptcy court “will promote judicial efficiency and avoid further delay in making distributions from the Merkin defendants’ assets” to hundreds of investors who otherwise would get nothing from Madoff’s estate, he told Rakoff.
Late last year, a Picard lawyer called the attorney general’s office, saying he had heard a settlement was close, Schneiderman said. Picard’s lawyer said the trustee would sue to stop the deal “if the NYAG did not agree within 48 hours that the bankruptcy court would have exclusive jurisdiction over any disputes between the trustee and the NYAG,” according to a September filing.
The attorney general rejected the demand, offering to hold a meeting that the lawyer said he would set up and never did, Schneiderman said.
Rakoff told the lawyers for the two sides to call the court by Jan. 4 to set up a schedule. He would explain his decision to take the case in a written opinion later, the judge said.
The case is Picard v. Schneiderman, 12-cv-06733, U.S. District Court, Southern District of New York (Manhattan).