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Haile Shaw & Pfaffenberger Attorneys at Law

Madoff Trustee Overstepped Authority, Properly Reined in by Court


In the February 13 Palm Beach edition of the Daily Business Review, Haile Shaw & Pfaffenberger attorney, Oren Tasini, wrote about a controversial legal case involving the liquidation of Bernie Madoff’s brokerage firm.

Sometimes in the midst of a controversial legal case, there is a risk that important legal principles get cast aside. As attorneys, it is our ethical duty to not let that happen. We must advance all plausible legal theories on behalf of our clients within the bounds of the law.

Case in point – the liquidation of Bernie Madoff’s brokerage firm. In an overzealous effort to recover money for the brokerage firm’s customers, Irving H. Picard, trustee for the liquidation of the estate of Bernard L. Madoff Investment Securities, LLC (BLMIS), attempted to reach beyond his statutory authority to seek the repayment of money from customers of BLMIS.

My partner Gary Woodfield and I represent a number of former customers of BLMIS,  many of who  were long-time customers and investors with Madoff and his brokerage firm BLMIS, with some dating as far back as 40 years ago. When first starting out in the business, Madoff acted as a sole proprietorship, before forming a legal entity, BLMIS, in 2001. In assessing the legal actions of the trustee against our clients seeking to recover money they allegedly received from both Madoff and/or BLMIS, it became clear that the trustee was exceeding his statutory authority and seeking relief from the bankruptcy court that was not within the power of the court to grant (i.e. the court lacked subject matter jurisdiction over the trustee’s claims).

The foundation of our argument stemmed from the fundamental constitutional principle that federal courts are ones of limited jurisdiction. They may only hear cases conferred upon them by Article III, Section 2 of the U. S. Constitution which limits an Article III court’s subject matter jurisdiction to cases arising under the U. S. Constitution or the federal laws of the United States (as well as treaties to which the United States is a party).

In the BLMIS liquidation, the powers accorded the Trustee and the bankruptcy court’s jurisdiction, stem from the provisions of the Securities Investment Protection Act (SIPA) of 1970. Liquidations of failed brokerage firms have unique aspects under SIPA; however, in essence they are conducted like proceedings under Chapter 11 of the Bankruptcy Code. In seeking to defend the trustee’s actions to recover money invested by our clients, we challenged the trustee’s actions to invalidate transactions occurring prior to 2001 that involved Madoff individually, as opposed to those involving his limited liability company, BLMIS, formed in 2001. We argued that under the provisions of SIPA, the actions by the trustee relating to transactions prior to 2001, conducted by and between Madoff individually and his customers, were not within the purview of SIPA, nor within the subject matter jurisdiction of the bankruptcy court overseeing the BLMIS liquidation. Therefore, the court’s subject matter jurisdiction only extended to those transactions occurring after 2001 and effected by BLMIS.

In a well-reasoned decision, United States Bankruptcy Judge Stuart Bernstein of the Southern District of New York, ruled, in a 62-page decision that Picard could not recover the alleged improper transfers made before 2001, because those transfers exceeded the jurisdictional authority of the court. Lacking subject matter jurisdiction, the court dismissed these claims with prejudice.

Some may question Judge Bernstein’s decision. The insolvency of BLMIS resulted in the loss by many customers of sizable sums of money. The ability of some customers to receive recompense, or to retain money they may have received, which the trustee is now seeking to recover (having an apt nomenclature of  a “clawback” action) is dependent in part on the total amount of money available. This recent decision will reduce the potential size of that pool.

However, such a concern is outweighed by the importance of preserving fundamental rights granted to each of us under the Constitution. The constitutional rights of Madoff customers to have the trustee’s “clawback” claims heard only by a court having the power to do so and only pursuant to a law granting the trustee the power to assert such claims must be respected and honored. Such a right is no less important than the right of a criminal defendant who claims a violation of the right to be free from an unreasonable search and seizure, or a property owner who claims their property was taken by the government without just compensation. In such matters, we do not weigh the importance of one right against the other. They must all be protected and preserved, lest none be.

We are a country where the rule of law applies. As attorneys, we are integral to preserving that principle. We advocate for our clients in a zealous fashion consistent with our ethical duty and the opposing party does the same. We rely on judges, within the strictures of the Constitution, to resolve competing arguments. In the Madoff case, while many may consider the recent decision questionable, the outcome is consistent and in harmony with our legal system. For our democracy to work, it must work for all regardless of who they are and even if the outcome is one that is not palatable to some.

Picard has recovered more than $11 billion for customers who have sought compensation for their alleged losses. However, in this case, Judge Bernstein correctly prevented Picard from reaching beyond his legal authority and recognized the limits of the court’s own power as well.

Oren Tasini is a shareholder with the law firm of Haile Shaw & Pfaffenberger in North Palm Beach.  He is one of the foremost authorities in Automotive Law in the United States and works with automotive dealerships regarding legal compliance, regulatory and franchise matters, and in the purchase and sale of automotive franchises. He also assists corporate clients in a variety of legal issues in connection with the formation, growth, operation and sale of business enterprises. Contact Oren at otasini@haileshaw.com.


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