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Bernard Madoff was arrested in 2008, but the trail of infamy surrounding his Ponzi scheme is far from over when it comes to litigation, and the liquidation of assets related to the fraud. In the latest development, the Second Circuit affirmed the lower courts' rulings, and we received news that the Bankruptcy Judge presiding over the case passed away over the weekend.
Understandably, there is a litany of litigation arising from Madoff's Ponzi scheme gone awry. The case before the Second Circuit had to do with a fundamental question regarding the way the litigation has been handled.
The bankruptcy court permanently enjoined state law tort action brought by investors (non-debtor third parties) against the estate of one of Madoff's co-conspirators. On appeal, the investors alleged that the bankruptcy court did not have the authority to enjoin their actions as derivative under the Bankruptcy Code, and even if it did, the court exceeded the limits of Article III. The district court disagreed, and the Second Circuit affirmed.
First, the court had to determine whether the investors' claims were duplicative or derivative of the claims asserted by the trustee in the bankruptcy proceeding. Finding that the investors were alleging secondary harms, and not particularized injury, the court found that the claims were derivative.
Furthermore, the court noted that the investors could not get around this by "pleading around" the claims. Finally, the court found that the bankruptcy court did exceed the limits imposed upon it by Article III.
U.S. Bankruptcy Judge Burton Lifland
In related news, U.S. Bankruptcy Judge Burton Lifland, the judge presiding over Madoff's Ponzi-scheme assets liquidation, passed away on Sunday (January 12, 2014), reports Reuters. It's currently unclear who will take his place, but as far as the derivative and duplicative issues go, he had the last word.
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