Withdrawal of Reference

Notice

A joint order has been issued by the United States District Court and the Bankruptcy Court fixing April 2, 2012 as a cut-off date to file Withdrawal of Reference motions in Madoff Liquidation claw back cases. Such a motion seeks a Court Order withdrawing a claw back case or issues within the case from the Bankruptcy Court (where it was previously referred) to the United States District Court.

For the reasons explained below, this is potentially a very significant motion and remedy; we urge all claw back defendants promptly review with counsel whether to seek such relief in their pending claw back action.

For those of you who may be unfamiliar with the Withdrawal of Reference process and how it applies to these claw back actions, set forth below in outline form, is a summary of the process and some examples of issues for which Withdrawal of Reference has been granted to date.¹

a. SIPC Liquidations are commenced by SIPC in the Federal District Court and then automatically referred for further proceedings to the Bankruptcy Court ( the “Reference”).

b. Notwithstanding the automatic reference, a claw back defendant may make a motion to the District Court to have the case Withdrawn from the Bankruptcy Court and returned to the District Court – a process known as “Withdraw the Reference”. Generally, the basis for the motion is that significant issues of non Bankruptcy federal law are presented for decision which should be determined by the District Court – a Constitutional Court of broad and general jurisdiction – which is deemed more suited to handle such non Bankruptcy issues than the Bankruptcy Court, a specialized court generally dealing only with cases within its limited specialized jurisdiction.

c. In the Madoff claw back cases, we understand that to date, Defendants in approximately 400 cases have already made motions for Withdrawal. Although the District Court may withdraw the reference for an entire case – as it did in the recently resolved Wilpon-Katz Sterling Equities case – in these Madoff matters, the Judge has generally focused on whether to remove specific issues rather than the entire case.

d. To date, the District Court has granted removal for a number of issues of significance to Madoff victims who are claw back defendants. One issue, for example, has already resulted in a ruling by the District Court dismissing all six year claims by the Trustee against a claw back defendant based on a “safe harbor” provision in the Bankruptcy Code that exempts certain securities transactions from avoidance actions.

e. Other significant issues for which removal has been sought or granted by the District Court include ( but are not limited to):

i. Whether the withdrawals which form the basis for claw back claims were received in good faith by the customer and were in reduction of a debt owed by Madoff/BLMIS on account of an antecedent debt. (If the Court rules in favor of the defendant on this issue, it could provide a full defense to all claims.);

ii. Whether required minimum distributions from Madoff accounts taken by defendants from IRA accounts to satisfy IRS requirements are exempt from claw back claims;

iii. Whether in an avoidance action, the Trustee may use his “cash in/cash out” net equity formulation over the entire life of an account (and related accounts) even though this would effectively circumvent the applicable Statute of Limitations on avoidance actions;

iv. Whether the Trustee has standing to assert some or all of the claims in the complaint;

v. Whether the Bankruptcy Court is barred, on Constitutional grounds, from determining these claw back claims by virtue of a recent Supreme Court decision (Stern v. Marshall) which held that only the District Court could render a final judgment in an analogous case;

There are other factors that a claw back defendant needs to consider with counsel. For example, as a general rule, the Bankruptcy Court cannot conduct jury trials absent consent from all parties. This may be significant to certain parties, particular those with sympathetic fact patterns. Also, there are cost and time considerations as well (although these cut both ways). Proceedings conducted in the Bankruptcy Court will subsequently be subject to at least two levels of appeal, first in the District Court and then in the Circuit Court of Appeals. If, however, the case is handled in the District Court or if the District Court resolves the case on motions without a trial, there will be only one appeal as of right (to the Circuit Court), which might be more cost effective.

Ultimately, we are not in a position to provide legal advice to you or tell you the best way to proceed. That is between you and your counsel. We do, however, urge that you review these issues promptly with your counsel because if you delay beyond the April 2, 2012 deadline, a subsequent motion to Withdraw will no doubt be met by a claim that it is untimely and should be denied without regard to the merits.

Bernfeld, DeMatteo & Bernfeld, L.L.P.
600 Third Avenue, 15th Floor
New York, NY 10016
Office: 212.661.1661
Fax: 212.557.9610