Bernard L. Madoff Investment Securities LLC v. Mayer

Background

Irving H. Picard, the trustee overseeing the liquidation of Bernard L. Madoff Investment Securities LLC and Bernard Madoff’s estate, brought an adversary proceeding in bankruptcy court. The trustee alleged that Legacy Capital, Ltd. was an investor in Bernard L. Madoff Investment Securities and was controlled by David and Rafael Mayer. The trustee further alleged that the Mayers knew in the mid-2000s that the business was a Ponzi scheme, concealed that knowledge, and extracted tens of millions of dollars in fictitious profits.

The trustee had already sued Legacy to recover transfers made to it, but Legacy indicated that it lacked sufficient assets to satisfy a judgment. The trustee therefore brought this proceeding to recover assets that Legacy allegedly transferred to other entities controlled by the Mayers.

Motion to Withdraw the Bankruptcy Reference

Rafael Mayer, Khronos Liquid Opportunities Fund Ltd., Prince Resources LDC, David Mayer, and Prince Capital Partners LLC moved under 28 U.S.C. § 157(d) to withdraw the bankruptcy reference. A bankruptcy reference is the district court’s referral of a bankruptcy matter to the bankruptcy court; in this district, that referral occurs automatically. Section 157(d) allows withdrawal for cause, and the defendants had the burden of showing cause.

The court applied factors from In re Orion Pictures, including whether the proceeding is a core bankruptcy matter, whether the claims are legal or equitable, efficiency, possible forum shopping, and consistent administration of bankruptcy law. After the Supreme Court’s decision in Stern v. Marshall, courts also consider whether the bankruptcy court has constitutional authority to enter a final judgment.

The court explained that fraudulent-conveyance claims generally cannot be finally decided by a bankruptcy court without the parties’ consent. But that did not require withdrawal at this early stage. The bankruptcy court could continue managing discovery, settlement discussions, trial preparation, summary-judgment motions, and proposed findings of fact and conclusions of law before any eventual trial or final adjudication in the district court.

Court’s Analysis

The bankruptcy court had managed the broader Madoff liquidation litigation since 2008, and the assigned bankruptcy judge had managed this litigation for more than a year. The district court stated that it would be greatly assisted by the bankruptcy court’s continued management.

The court also found that the proceeding was a core bankruptcy proceeding. Although the defendants had a right to a jury trial, the court gave that consideration less weight because the case was not ready for trial. The court further found that withdrawing the reference soon after the bankruptcy court denied the defendants’ motion to dismiss could encourage parties to use withdrawal motions as a way to obtain a quick second look at an unfavorable bankruptcy-court decision.

The defendants also argued that foreign law could affect the claims and defenses, and that the district court had experience with alter-ego and veil-piercing issues under English law. The court concluded that any helpful legal guidance was already available to the parties and the bankruptcy court, while factual development during discovery was more important at this stage.

Disposition

Judge Denise Cote denied the January 28, 2022 motion to withdraw the bankruptcy reference without prejudice to any renewed motion when the case is ready for trial. The opinion did not decide the underlying fraudulent-conveyance claims or defenses.