Bloomberg News

U.S. Bankruptcy Courts’ Powers Clarified by Federal Judge

May 10, 2012

Bankruptcy judges don’t have power to make final rulings on claims for fraudulent transfers and unjust enrichment, a federal judge said, citing a U.S. Supreme Court ruling in the Anna Nicole Smith case.

U.S. District Judge Jed S. Rakoff in Manhattan issued the ruling yesterday in a case involving the Refco litigation trust. His law clerk sent the decision to lawyers for the liquidator of Bernard L. Madoff’s brokerage 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.

In their requests to have cases moved from bankruptcy court to district court, some Madoff defendants have cited the Smith case, 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.

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 the trustee, Irving Picard. Those seeking to move cases included HSBC Holdings Plc (HSBA), UniCredit SpA (UCG) and Merrill Lynch, as well as former spouses of Madoff’s sons.

The transfer of cases has undercut U.S. Bankruptcy Judge Burton Lifland’s power to reverse some fraudulent transfers and limited Picard’s ability to collect money to pay victims of Madoff’s $52 billion Ponzi scheme, the largest in U.S. history. This month, Rakoff sent 84 lawsuits against investors back to bankruptcy court, limiting the trustee to trying to take back two years of fake Ponzi profits rather than six years of payouts from the scheme.

Mets Settlement

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

To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net.

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


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