The Madoff liquidation makes important law again.
On an issue where some courts disagree, District Judge Lorna G. Schofield of New York held that a creditor consents to final adjudication in the bankruptcy court, and forfeits the right to a jury trial, by having filed a claim, even if the claim was denied before the fraudulent transfer suit was filed.
Of further significance, Judge Schofield declined to follow three New York bankruptcy and district court opinions with language suggesting that denial of a claim might entitle the defendant to withdrawal of the reference.
Judge Schofield was deciding a motion to withdraw the reference brought by a defendant who was continuing a seemingly hopeless, 10-year effort to avoid an inevitable $2.6 million judgment for receipt of a fraudulent transfer. Unlike other defendants in similar circumstances who have long since capitulated, the defendant before Judge Schofield is facing prejudgment interest that could double the judgment.
Coincidentally, another New York district judge handed down a decision on the same day effectively telling Bernie Madoff that he will die in jail.
The Motion to Withdraw the Reference
After disclosure of the $17 billion Ponzi scheme, the Madoff liquidation began in late 2008 in the bankruptcy court in New York under the Securities Investor Protection Act. Judge Schofield was dealing with a so-called net winner, meaning a Madoff customer who had taken $2.6 million more out of the Ponzi scheme than he had invested.
The customer filed a proof of claim for the balance shown on his last account statement from Madoff. Of course, the balance in the account was fictitious because Bernie Madoff never purchased a single share of stock with customers’ investments.
The Madoff trustee therefore denied the claim, which became final. Later, the Second Circuit upheld the rationale for denying similar claims. The appeals court ruled that customers have valid claims only to the extent that the cash they invested exceeded whatever they managed to take out. Therefore, net winners have no customer claims.
Under law that has been established in Madoff cases, net winners not only have no valid customer claims, they are also liable for receipt of “actual” fraudulent transfers under Section 548(a)(1)(A) for money taken out within two years of bankruptcy. The year after the net winner’s claim was denied, the Madoff trustee sued him for about $2.6 million.
The suit was scheduled for a bench trial in bankruptcy court in April 2020, but the net winner filed a motion under 28 U.S.C. § 157(d) to withdraw the reference.
Judge Schofield denied the motion in her opinion on June 4.
The Rationale
The net winner contended that he was entitled to a final ruling in district court because he had never consented to trial in bankruptcy court and had not waived his right to a jury. He argued that the claim he had filed was no longer a basis for final adjudication in bankruptcy court because the claim had been denied about 10 years ago.
None of the arguments persuaded Judge Schofield. She called them “meritless.”
Naturally, Judge Schofield surveyed Supreme Court authority, such as Stern, Granfinanciera and Wellness International. From the high court authority, she gleaned the principle that the filing of a claim (1) initiates the claims allowance process that invokes the court’s equitable jurisdiction in a lawsuit involving the same subject matter; (2) waives the right to a jury trial; and (3) consents to final adjudication in bankruptcy court.
Addressing the net winner’s arguments, Judge Schofield said that “the majority of courts” have held that disallowance or withdrawal of a claim does not oust the bankruptcy court of the power to issue a final ruling without a jury.
Judge Schofield analyzed one district court decision and two bankruptcy court rulings in the Madoff liquidation that could be read to suggest that denial of a claim takes a later fraudulent transfer suit out of the claims allowance process. She said those decisions “are inapposite and do not bind the Court.”
Judge Schofield pointed out that the three cases involved different issues. One bankruptcy court decision dealt with personal jurisdiction, and the second only cited the first for the proposition that Section 502(d) would not apply when the claim had been disallowed.
In the district court case, the judge had said that filing a claim alone does not give the bankruptcy court final adjudicatory power over an avoidance action. However, the district judge went on to say that the bankruptcy court would have final power if the trustee had sought to disallow the claim under Section 502(d).
Judge Schofield fell in line with cases holding that denial or withdrawal of a claim does not oust the bankruptcy court of final adjudicatory power without a jury.
Judge Schofield gave a second, independent reason for denying the withdrawal motion: Even if the claims allowance process were no longer grounds, she ruled that the defendant’s filing of a claim was implied consent to final adjudication in bankruptcy court. See Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932 (2015).
The conclusion about waiver, Judge Schofield said, was “strengthened” because the trustee is suing under avoiding powers in the Bankruptcy Code, not in pursuit of state-law claims like Stern.
Apart from constitutional considerations, Judge Schofield found that the Orion factors did not justify withdrawal of the reference.
Bernie Madoff to Die in Jail
Also on June 4, District Judge Denny Chin denied Bernie Madoff’s motion for compassionate release. Madoff said he has end-stage kidney disease and has 18 months to live.
When he sentenced Madoff in 2009 to 150 years in prison, Judge Chin said “it was fully my intent that he live out the rest of his life in prison . . . . Nothing has happened in the 11 years since to change my thinking.”
The withdrawal of the reference opinion is Picard v. Greiff, 20-2560 (S.D.N.Y. June 4, 2020). Click here to view the opinion.
The opinion denying compassionate release is U.S. v. Madoff, 09-213 (S.D.N.Y. June 4, 2020). Click here to view the opinion.
U.S. v. Madoff, 09-213 (S.D.N.Y. June 4, 2020).
The Madoff liquidation makes important law again.
On an issue where some courts disagree, District Judge Lorna G. Schofield of New York held that a creditor consents to final adjudication in the bankruptcy court, and forfeits the right to a jury trial, by having filed a claim, even if the claim was denied before the fraudulent transfer suit was filed.
Of further significance, Judge Schofield declined to follow three New York bankruptcy and district court opinions with language suggesting that denial of a claim might entitle the defendant to withdrawal of the reference.
Judge Schofield was deciding a motion to withdraw the reference brought by a defendant who was continuing a seemingly hopeless, 10-year effort to avoid an inevitable $2.6 million judgment for receipt of a fraudulent transfer. Unlike other defendants in similar circumstances who have long since capitulated, the defendant before Judge Schofield is facing prejudgment interest that could double the judgment.
Coincidentally, another New York district judge handed down a decision on the same day effectively telling Bernie Madoff that he will die in jail.