Irving H. Picard v. Bam L.P.

Background

The case arose from the liquidation of Bernard L. Madoff Investment Securities LLC under the Securities Investor Protection Act, a federal law governing the liquidation of certain failing brokerage firms. Defendants Michael Mann, Meryl Mann, and BAM L.P. filed customer claims seeking to recover alleged account balances from the estate. The trustee denied the claims, stating that no securities had been purchased for the accounts and that defendants had withdrawn more than they deposited.

The trustee later sued defendants under sections 548(a) and 550(a) of the Bankruptcy Code to avoid and recover alleged excess transfers from their accounts. The bankruptcy court overruled defendants’ objection to the trustee’s calculation of their net equity, and the Second Circuit affirmed that ruling.

After discovery ended and shortly before trial, defendants sought to withdraw their customer claims and move the case from the bankruptcy court to the district court. The bankruptcy court granted withdrawal of the customer claims with prejudice, but ruled that the withdrawal did not eliminate its authority to decide the trustee’s claims. Defendants then sought permission to appeal that ruling.

Motion to Withdraw the Bankruptcy Reference

The district court denied defendants’ motion to withdraw the bankruptcy reference under 28 U.S.C. § 157(d). A withdrawal of the reference would move the proceeding from the bankruptcy court to the district court.

Judge Broderick concluded that the trustee’s claims to avoid and recover fraudulent transfers were core bankruptcy proceedings. He also concluded that the claims were equitable because defendants had filed claims against the estate. Filing those claims triggered the bankruptcy process for deciding whether claims against the estate should be allowed or disallowed.

The court further held that the bankruptcy court had constitutional authority to enter a final decision on the trustee’s claims. Under the court’s reasoning, the trustee’s claims were part of the claims-allowance process because federal bankruptcy law would require defendants’ claims to be disallowed if defendants had received recoverable fraudulent transfers. Defendants’ later withdrawal of their claims, nearly a decade after filing them and after the adversary proceeding had begun, did not undo that authority.

The court also relied on efficiency, cost, delay, uniform bankruptcy administration, and the bankruptcy judge’s extensive familiarity with the liquidation. It found that transferring the matter would delay resolution, remove core issues from the court with substantial experience handling the liquidation, and risk inconsistent results.

Motion for Leave to Appeal

The district court also denied defendants’ motion for leave to appeal under 28 U.S.C. § 158(a). The court rejected defendants’ argument that there was a substantial difference of opinion about whether withdrawing their claims removed the bankruptcy court’s authority. It also concluded that further briefing and an immediate appeal would not materially advance resolution of the litigation and would cause additional delay.

Disposition

Judge Vernon S. Broderick ordered that defendants’ motion to withdraw the bankruptcy reference was DENIED. He separately ordered that defendants’ motion for leave to appeal was DENIED. The clerk was directed to terminate the open motion in the district-court case and close the related appeal.