Madoff Trustee Meets Stern v. Marshall

Posted by Kathy Bazoian Phelps

   In connection with the SIPA proceeding of Bernard L. Madoff Investment Securities, LLC, the district court issued its ruling on whether the U.S. Supreme Court decision in Stern v. Marshall, 131 S. Ct. 2594, 180 L. Ed. 2d 475 (2011), prohibits the bankruptcy court from issuing a final ruling on a fraudulent transfer claim. The Madoff trustee has filed hundreds of fraudulent transfer claims against net winners and others in the Madoff proceeding, and those defendants were given the opportunity and a deadline by District Judge Rakoff to file motions seeking to withdraw the reference under Stern v. Marshall. The court heard arguments in June 2012 and has now issued a ruling on the matter. SIPC v. Madoff, 2013 U.S. Dist. LEXIS 2517 (S.D.N.Y. Jan. 4, 2013).

   The court held that "although Stern precludes the Bankruptcy Court from finally deciding avoidance actions (unless, possibly, the Trustee has sought to disallow a claim to the estate under § 502(d)), the Bankruptcy Court nonetheless has the power to hear the matter in the first instance and recommend proposed findings of fact and conclusions of law. The Court further declines to withdraw the reference of these cases to the Bankruptcy Court ‘for cause shown’ before the Bankruptcy Court has issued appropriate findings of fact and conclusions of law." Id. at *54.

   In other words, the bankruptcy court will do the heavy lifting and try the cases, issuing proposed findings of fact and conclusions of law, but not a judgment. Judge Rakoff will then get to decide whether he agrees with the bankruptcy court’s conclusions and enter judgment accordingly.