In a move that was not entirely unexpected, attorneys representing the New York Mets owners asked United States District Judge Jed S. Rakoff to deny immediate appellate review of his decision that dismissed many of the claims asserted by the court-appointed receiver of Bernard Madoff's massive Ponzi scheme. While Irving Picard, the court-appointed bankruptcy trustee, cited the far-reaching implications of the decision, attorneys for Mets owners Fred Wilpon and Saul Katz downplayed the need for immediate review, stating that no hardship or injustice would result from waiting until the currently scheduled March 2012 trial to raise any appealable issues.
As part of his quest to recover the estimated $20 billion in principal losses resulting from Madoff's scheme, Picard filed over 1,000 preference actions under the Bankruptcy Code that are more commonly known as clawback suits. Picard sought nearly $1 billion from Katz and Wilpon, who, because of their sophisticated investment knowledge, he argued should also be compelled to return their $300 million principal investment to the bankruptcy estate for the benefit of Madoff victims. In a decision issued last month, Judge Rakoff rejected many of Picard's claims and limited his maximum possible recovery to less than $400 million out of the $1 billion originally sought. Judge Rakoff based his rationale on several theories, including the "safe harbor" provision located in section 546(e) of the Bankruptcy Code, which, under Judge Rakoff's interpretation of "settlement payments" defined in the provision, prevented Picard from recovering any funds transferred beyond the two-year look-back period set forth in the Bankruptcy Code. Importantly, this would prohibit Picard from utilizing longer 'look-back' periods codified in the New York Debtor and Creditor Law, under which Picard had previously proceeded under and which allowed the clawback of funds transferred up to six years before Madoff's firm was forced into bankruptcy.
Judge Rakoff's decision had several immediate consequences, the most notable of which was the postponement of the first scheduled distribution of funds to victims while Picard's legal team assessed the potential impact of the decision on future recoveries. The distribution was made several days later, but not before one of Picard's lawyers estimated that the decision would eliminate several billion dollars in future potential recoveries. The decision also shaved the maximum possible recovery in the Katz and Wilpon clawback suit from $1 billion to under $400 million. The essence of Judge Rakoff's decision was made brutally simple: if an investor didn't make withdrawals from their account at Madoff's brokerage within two years of the date the firm was forced into bankruptcy, they were essentially immune from the reach of a clawback suit. Further, Judge Rakoff ruled that, in order to recover the underlying principal investments, Picard would have to demonstrate that the owners were "willfully blind" to the Ponzi scheme.
Following the decision, many observers assumed it was inevitable that Picard would appeal the decision, simply due to the ramifications on current and future clawback litigation. As expected, Picard appealed the ruling, and sought an expedited review by the Second Circuit Court of Appeals. However, such immediate review is not a guaranteed right. Instead, one of two conditions must be satisfied. The first instance involves the finality of the order. Ordinarily, appellate review is granted only for final orders. The second involves the statutory process under 12 U.S.C. 1292(b) involving when an appeal of a non-final order - commonly referred to an an interlocutory appeal - is allowed. In his motion in support of this immediate right to appeal, Picard sought either the certification of Judge Rakoff's dismissal as a final order under Rule 54(b) of the Federal Rules of Civil Procedure, or, in the alternative, the certification of the issues for immediate appeal under Section 1292(b) as the ruling was disputed and involved a controlling question of law.
Specifically, Picard sought appellate review of three issues: (1) whether the payments made by Madoff to investors constituted "settlement payments" and thus qualified for inclusion in the safe harbor provision of § 546(e); (2) whether the application of section 546(e) prevents Picard from recovering avoidable transfers from subsequent transferees; and (3) , as a matter of law, the safe harbor provision of § 546(e) bars recovery from immediate or mediate transferees pursuant to § 550 of transfers that are avoidable as against the initial transferee pursuant to § 548(a)(1)(A); and (3) whether the Court's order with respect to section § 78fff- 2(c)(3) of SIPA and § 502(d) of the Bankruptcy Code was contrary to Second Circuit's previous "net equity" decision.
The Securities Investor Protection Corporation, which has compensated Madoff victims for up to $500,000 of their losses and also pays Picard's legal fees, also weighed in on the issue, stating that rather than restricting Picard's reach to a two-year limit on clawbacks, “the court must consider all transfer regardless of timing.”
Picard's motion in favor of immediate appeal is here.