Bernard L. Madoff Investment Securities LLC v. Goodman

Background

The Trustee, Irving H. Picard, brought a fraudulent-transfer lawsuit against Goodman in connection with the liquidation of Bernard L. Madoff Investment Securities LLC under the Securities Investor Protection Act. The Trustee alleged that Goodman maintained an account with the company and received more than $800,000 in fictitious profits from the Ponzi scheme. The Trustee asserted several fraudulent-transfer claims.

Goodman filed an answer, demanded a jury trial, and stated that he did not consent to the bankruptcy court entering final orders or judgment. He also did not file a customer claim against the bankruptcy estate. Discovery closed in December 2019. Goodman previously challenged the bankruptcy court’s authority during the litigation and again moved the district court to withdraw the bankruptcy reference.

The motion to withdraw the reference

A bankruptcy reference sends a bankruptcy-related proceeding to the bankruptcy court for handling. Goodman asked the district court to withdraw that reference under 28 U.S.C. § 157(d). He argued that the bankruptcy court lacked constitutional authority to conduct a jury trial or enter a final judgment. The Trustee argued that Goodman had impliedly consented by litigating in bankruptcy court for nearly a decade. The Trustee also argued that the bankruptcy court could handle the proceeding and submit proposed findings and legal conclusions to the district court for review.

Final-judgment authority

The court held that the fraudulent-transfer claims were “core” bankruptcy proceedings under 28 U.S.C. § 157(b)(2)(H), but that the bankruptcy court nevertheless lacked constitutional authority to enter the final judgment. The court considered three possible exceptions that can permit a bankruptcy court to enter a final judgment on claims of this type:

The court therefore held that a federal district court, rather than the bankruptcy court, would have to enter any final judgment. The bankruptcy court could still hear the proceeding and submit proposed findings of fact and legal conclusions for the district court’s independent review.

Other factors

The court then considered whether the reference should nevertheless remain in bankruptcy court for now. Judicial efficiency weighed strongly against immediate withdrawal because the bankruptcy court had handled the proceeding for more than ten years and had extensive experience with hundreds of related proceedings in the Madoff liquidation. Keeping the case there also promoted consistent administration of the related bankruptcy matters.

The court found that preventing forum shopping weighed slightly against withdrawal. It also held that Goodman’s jury demand did not require immediate withdrawal. Although the court found that Goodman had preserved a valid jury-trial right, the Trustee planned to seek summary judgment, so the case was not yet ready for trial. The court explained that the jury issue would become relevant to withdrawal if the case survived dispositive motions and proceeded toward trial.

Disposition

The court denied without prejudice Goodman’s motion to withdraw the bankruptcy reference. Goodman may renew the motion when the case is trial-ready. The bankruptcy court was directed to issue an opinion on the Trustee’s anticipated summary-judgment motion. If summary judgment is appropriate, the district court will independently review the bankruptcy court’s report and recommendation and, if appropriate, enter final judgment. Otherwise, Goodman may renew the withdrawal motion and the case will proceed to trial.