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Sunday
Oct162011

Judge: Cayman Islands Lawsuit Against Madoff Trustee is Void

A Bankruptcy Court Judge issued a strongly-worded order holding that a lawsuit recently filed in the Cayman Islands against the Madoff trustee was void and could not proceed any further.  Irving Picard, the court-appointed trustee for Bernard L. Madoff Investment Securities ("BLMIS"), sued Maxam Absolute Return Fund, Ltd ("Maxam"), seeking the return of nearly $100 million in fraudulent transfers made in the six years preceding the bankruptcy filing of BLMIS.  After answering that complaint, Maxam then filed an action in the Cayman Islands (the "Cayman Action") seeking a declaration that Maxam was not liable for the transfers.  According to Judge Lifland, that action is forbidden by the Bankruptcy Code and other federal laws, and constitutes a "clear attack on this Court’s exclusive jurisdiction and a blatant attempt to hijack the key issues to another court for determination."

While such an action would normally be allowed, the act of filing for bankruptcy triggered provisions in the Bankruptcy Code that forbid actions by third parties to recover or obtain assets in the bankruptcy estate. Specifically, section 362 of the Bankruptcy Code contains what is known as an "automatic stay" provision that forbids:

the commencement or continuation . . . of a judicial, administrative, or other action or proceeding against the debtor,” or “any act to obtain possession of . . . or to exercise control over property of the estate.

Additionally, BLMIS's membership in the Securities Investor Protection Corporation ("SIPC") resulted in the bankruptcy being subject to the provision of the Securities Investor Protection Act, which contains similar prohibitions.  In the Cayman Action, Maxam sought 

a declaration that Maxam Limited is not liable to the Trustee for either the $25 million Maxam Limited received from Maxam Fund within the period of 90 days prior to the Filing Date or any amounts in excess of the $25 million that Maxam Limited received from Maxam Fund within the period of two years prior to December 11, 2008.

However, according to Judge Lifland, the Bankruptcy Code and SIPA prevent such an action from continuing. Noting that Picard would be forced to essentially relitigate the merits of the clawback lawsuit, Judge Lifland opined that unneeded time, expenses and resources would be expended.  Additionally, the suit interferes with the Bankruptcy Court's exclusive jurisdiction over the property of Madoff's brokerage firm.  Finally, Judge Lifland also noted that the suit violated the Barton Doctrine, which is a judge-created rule that before a court-appointed receiver or trustee can be sued, the petitioning party must first seek leave of the court.  

Under Section 105 of the Bankruptcy Code, a Bankruptcy Court is granted equitable powers to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Code].” Noting the ramifications should each foreign individual or entity sued by Picard be permitted to seek relief in their own country, Judge Lifland utilized these powers by issuing an injunction preventing Maxam from continuing the Cayman Action.   

A copy of the Order is here.