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Second Circuit Orders Delay in Madoff Feeder Fund Clawbacks Pending SCOTUS Petition

The U.S. Court of Appeals for the Second Circuit and the U.S. District Court for the Southern District of New York. (Photo: Ken Lund)

The U.S. Court of Appeals for the Second Circuit and the U.S. District Court for the Southern District of New York. Photo: Ken Lund

A group of nearly 250 financial institutions, facing attempts by the trustee of the Bernie Madoff fund to claw back allegedly ill-gotten gains, received a reprieve from the U.S. Court of Appeals for the Second Circuit on Tuesday, ahead of a petition to be heard by the U.S. Supreme Court.

The panel of Circuit Judges Dennis Jacobs, Rosemary Pooler, and Richard Wesley granted a stay of the February order issued by the same pending a writ of certiorari the litigants plan to file by early July.

According to the defendant-appellees, they intend to present to the Supreme Court two questions about the Second Circuit’s order.

First, they argue the panel incorrectly expanded the reach of U.S. bankruptcy law to allow a trustee like the one in the Madoff case, Irving Picard, to “unwind” foreign financial transactions “remotely” related to domestic ones made by a U.S. debtor. The defendants claim that the panel misapplied precedent, “resulting in a decision that undermines the presumption against extraterritoriality and is in conflict with relevant decisions of the Supreme Court.”

Second, the petition will ask the high court to address an alleged conflict with other U.S. courts of appeals who’ve dealt with the application of international comity in dismissals over foreign insolvency proceedings involving foreign investment funds.

The trustee argued that the appellate court was right to reverse the prior dismissal of more than seven dozen proceedings. There was no need, after a decade of litigation, for the cases not to move forward, Picard argued. The conflicts claimed by the defendants don’t apply to the specific issue of extraterritoriality in the current situation. On that issue, the Second and Fourth Circuits are the only two to have considered the question, and “are in complete agreement, with no judge of either court dissenting,” according to Picard.

The defendants likewise muddle the issue of comity—confusing adjudicative with prescriptive. Their arguments are supported by cases dealing with the former; Picard argued that the one at present was of the latter variety.

“Nothing in this case supports a departure from the ordinary rule that this Court’s mandate should issue, and that remanded proceedings should commence, while Defendants pursue a writ of certiorari,” Picard argued.

The defendants' legal efforts were led by Cleary Gottlieb Steen & Hamilton partners Carmine Boccuzzi Jr. and Thomas Moloney. Neither responded to a request for comment.

Counsel for the trustee, Baker & Hostetler partner David Sheehan, also did not respond to a request for comment.

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