Courts are on the verge of shutting the door, once and for all, on “net winners” from the Bernard Madoff Ponzi scheme who refuse to pay back fictitious profits they received in the two years before commencement of the liquidation in bankruptcy court under the Securities Investor Protection Act.
In the latest opinion on February 17, District Judge Colleen McMahon of New York granted summary judgment in favor of the Madoff trustee for more than $2.6 million, plus prejudgment interest since 2010 at 4%. Regarding the Madoff customers who took out more cash than they invested, she said that they “have wasted the [Madoff] Trustee’s time and resources and the Court’s as well.”
If the Second Circuit rules for the Madoff trustee in a pending appeal involving the same issues but different customers, Judge McMahon said in a footnote at the end of her opinion that courts in the future “may have to consider” imposing Rule 11 sanctions on customers or lawyers who refuse “to accept repeated rulings of both fact and law.”
The Similar Case on Appeal
In one of the other 120 adversary proceedings against customers who took fictitious profits out of the Madoff Ponzi scheme, District Judge John G. Koeltl entered summary judgment in favor of the trustee for $2.925 million plus some $1.2 million in 4% prejudgment interest. See Picard v. JABA Assocs. LP, 528 F. Supp. 3d 219 (S.D.N.Y. March 24, 2021).
The customers’ appeal from the JABA decision is scheduled for argument in the Second Circuit on March 16. The JABA appeal is being prosecuted by the same lawyers who lost when Judge McMahon handed down her decision on February 17. In the JABA appeal, the same lawyers are raising the same arguments rejected by District Judges Koeltl and McMahon.
So far, the Madoff trustee has made more than $14.5 billion in settlements and recoveries, and customers have received more than 70% of their cash losses. The possibility remains that the customers will recover 100%, in view of two decisions from the Second Circuit reversing another district judge and reinstating scores of fraudulent transfer lawsuits. To read ABI’s reports on those decisions, click here and here.
The Case Before Judge McMahon
In bankruptcy court before Bankruptcy Judge Cecelia Morris of New York, the Madoff trustee was suing the estate of a deceased customer and related entities for some $2.6 million in so-called fictitious profits taken out of the Ponzi scheme in the two years before bankruptcy. The profits were fictitious because Madoff never invested a dime of customers’ investments. The profits were actually money stolen from other defrauded customers.
The Second Circuit recognizes the so-called Ponzi scheme presumption, which establishes that customers received fraudulent transfers made with “actual intent.” Because it’s Madoff’s fraudulent intent that matters, not the customer’s, the presumption means that the trustee only needs to prove how much of the debtor’s property was transferred to the defendants within two years of bankruptcy.
In the adversary proceeding before Bankruptcy Judge Morris, the defendant-customers had filed a motion to withdraw the reference, but the district court had not ruled on the withdrawal motion. The Madoff trustee filed a motion for summary judgment. Judge Morris decided that she was entitled to enter a final order because the reference had not been withdrawn.
Opposing summary judgment, the customers argued that they had received transfers from Bernard Madoff personally and not from the limited liability corporation being liquidated under SIPA. The same factual question had been litigated in other Madoff cases, leading Judge Morris to believe that the transfer of the debtor’s property was “law of the case” in favor of the trustee.
Granting summary judgment in favor of the trustee for $2.6 million plus prejudgment interest, Bankruptcy Judge Morris said that her decision should be taken as a report and recommendation if she was not entitled to enter a final order.
The customers appealed to Judge McMahon.
The Decision by District Judge McMahon
On appeal, the customers argued that the bankruptcy court was not entitled to enter final judgment and that “law of the case” was improperly applied. Judge McMahon agreed. Even though the Madoff trustee lost the battle on those two issues, the trustee won the war because Judge McMahon concluded that the trustee was entitled to summary judgment for the same $2.6 million and 4% prejudgment interest.
In a fraudulent transfer suit against defendants not consenting to final orders in bankruptcy court, Judge McMahon held that the bankruptcy court cannot enter final judgment under Stern v. Marshall, 546 U.S. 462 (2012). “[I]t makes little practical difference,” she said, because the decision by the bankruptcy court would be subject to de novo review regardless of whether she was ruling on summary judgment in the first instance or reviewing a grant of summary judgment in bankruptcy court.
Principally, the customers were arguing on appeal that they were customers of Bernard Madoff individually, not the limited liability corporation being liquidated under SIPA. The bankruptcy court believed that the issue was “law of the case” against the customers.
Judge McMahon said that the doctrine of law of the case applies to legal conclusions, not fact-findings. “But the fact that [the bankruptcy judge] relied on the wrong doctrine does not mean that Appellants are entitled to a trial,” she said.
“I happen to agree with my colleague Judge Koeltl that there is no ‘dispute of material fact’” that the debtor’s bank account was used to make payments to the customers. She said that the trustee’s “evidence was not controverted in the slightest” by the customers.
Granting summary judgment for the trustee, Judge McMahon said,
I will not force the trustee to go through yet another trial, and waste still more of the estate’s assets, proving facts that Appellants have failed to controvert on the record before me except with wishes and hopes.
For the same reason, Judge McMahon imposed 4% prejudgment interest, just like the bankruptcy judge. She said,
Appellants have done nothing more than regurgitate arguments already made and rejected without casting the slightest doubt on the evidence that has been the cornerstone of every one of these cases . . . . [The customers] have wasted the Trustee’s time and resources and the Court’s as well.
Observation
Judge McMahon could have avoided writing her 40-page opinion by waiting for the Second Circuit to rule on the JABA appeal to be argued on March 16. Evidently, Judge McMahon strongly believes that the outcome should favor the Madoff trustee, because her opinion reads like an amicus brief on the trustee’s side in the Second Circuit JABA appeal.
Courts are on the verge of shutting the door, once and for all, on “net winners” from the Bernard Madoff Ponzi scheme who refuse to pay back fictitious profits they received in the two years before commencement of the liquidation in bankruptcy court under the Securities Investor Protection Act.
In the latest opinion on February 17, District Judge Colleen McMahon of New York granted summary judgment in favor of the Madoff trustee for more than $2.6 million, plus prejudgment interest since 2010 at 4%. Regarding the Madoff customers who took out more cash than they invested, she said that they “have wasted the [Madoff] Trustee’s time and resources and the Court’s as well.”
If the Second Circuit rules for the Madoff trustee in a pending appeal involving the same issues but different customers, Judge McMahon said in a footnote at the end of her opinion that courts in the future “may have to consider” imposing Rule 11 sanctions on customers or lawyers who refuse “to accept repeated rulings of both fact and law.”