Judge Rakoff Denies Madoff Trustee's Attempt to Halt NYAG Settlement With Feeder Fund

In an opinion yesterday, Judge Rakoff rejected a motion from the trustee of Bernard Madoff’s securities firm to void a $410 million settlement between the New York Attorney General and certain Madoff feeder funds associated with Ezra Merkin. Judge Rakoff found that the trustee had simply waited too long:

[T]he Trustee could have acted at any of a number of points in the history of these cases to enforce the automatic stay: when the Trustee filed his action against the Merkin defendants and the Merkin funds in May 2009; when he first threatened to enjoin the settlement in November 2009; or at any point throughout the course of the NYAG’s lengthy and highly public litigation against the Merkin defendants. Instead, while bombastically threatening to enjoin the NYAG’s and Receiver’s actions, the Trustee allowed these cases to proceed for over three years before attempting to enforce the automatic stay. It is clear, therefore, that the Trustee unreasonably and inexcusably slept on his rights. Even then, however, such a delay might be forgiven if it had not caused prejudice to the defendants. But in fact, the prejudice to the defendants here, to the investors in the Merkin Funds, and even to the New York Supreme Court that managed the NYAG’s case for three years, cannot be overstated. The NYAG expended substantial public resources and engaged in extensive investigation and litigation in bringing its enforcement action against the Merkin defendants: even before filing its case, attorneys from the NYAG’s office conducted interviews of investors, obtained sworn testimony from Merkin and his employees, and reviewed thousands of documents. Ellenhorn Decl. ¶ 3. The parties then engaged in years of litigation, including briefing and arguing motions to dismiss and motions for summary judgment and engaging in a year of discovery, at great expense to all involved. Id. ¶¶ 6-7. Throughout this time period, the NYAG and the Receivers responded to investor inquiries, confirming that a significant portion of any moneys obtained from Merkin would be returned to his investors. Schwartz Decl. ¶ 12. Thus, many as hundreds of Merkin’s investors -- who have no ability to file claims in the Trustee’s claims administration process as “indirect” customers of Madoff Securities -- refrained from bringing their own actions against Merkin in reliance on the NYAG and Receiver actions. Id. ¶ 14. Declaring the NYAG’s suit void ab initio at this point would effectively cause these investors to lose their claims, and all because the Trustee chose to wait so long before seeking to enforce the automatic stay.

Judge Rakoff’s opinion noted that Judge Marrero had reached the same conclusion in a “very persuasive” opinion in another case (see here for our earlier post on Judge Marrero's ruling).