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Insurer Must Face $31.6M Madoff Claims In Bankruptcy Court

30 May 2012

A bankruptcy court has jurisdiction to decide whether Connecticut General Life Insurance Co. controlled $31.6 million in fraudulent transfers from Bernard L. Madoff's collapsed firm, a New York federal judge said Tuesday, ruling against the insurer.

U.S. District Judge Jed S. Rakoff denied the insurer’s Oct. 12 motion to withdraw a reference to the bankruptcy court. The ruling means a bankruptcy court, rather than the district court, will decide a key issue in the suit by Bernard L. Madoff Investment Securities LLC trustee Irving Picard: whether CGLIC had dominion over the transfers or merely acted as a conduit.

The Second Circuit has held that a so-called fraudulent transferee must have dominion, or the ability to put funds to its own purposes. A bankruptcy court cannot decide that issue in CGLIC’s case because it involves broader questions of state law, the insurer said in its motion.

But Judge Rakoff said Tuesday that CGLIC’s case just concerned federal bankruptcy law — specifically, the interpretation of the word "transferee" in the federal bankruptcy code. Regardless, bankruptcy courts often refer to principles of state law in order to avoid burdening district courts, the judge said.

"If state law issues mandated withdrawal of reference, district courts could refer few cases to the bankruptcy courts, and the division of business between district and bankruptcy courts would be radically altered," the judge said.

At the same time, the judge granted CGLIC’s motion to withdraw reference to the bankruptcy court on two other legal issues that previously had been withdrawn in several Picard clawback suits.

One issue is whether section 546(e) of the bankruptcy code limits the trustee’s ability to avoid transfers. The other concerns the U.S. Supreme Court’s decision last year in Stern v. Marshall, which held that bankruptcy courts are constitutionally prohibited from issuing final decisions in certain cases.

Attorneys for Picard and CGLIC did not immediately respond Wednesday to requests for comment. Amanda Remus, a spokeswoman for Picard, declined to comment.

The dispute began in December 2010, when Picard launched two separate clawback suits against CGLIC seeking a total of $31.6 million in allegedly fictitious profits from Madoff’s Ponzi scheme. The money was held in Madoff accounts for years but actually belonged to other people, Picard claimed.

Picard is represented by Marc E. Hirschfield, Nicholas J. Cremona and Oren J. Warshavsky of Baker & Hostetler LLP.

CGLIC is represented by David S. Flugman of Kirkland & Ellis LLP.

The case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, case number 12-mc-00115, in the U.S. District Court for the Southern District of New York.

The clawback suits are Irving H. Picard v. Connecticut General Life Insurance Co. et al., case numbers 11-cv-7174 and 11-cv-7176, in the U.S. District Court for the Southern District of New York.

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