Irving Picard
Irving Picard ()

While most people were enjoying the tail end of a long holiday weekend, U.S. District Judge Jed Rakoff in Manhattan was busy Sunday delivering a key victory to foreign banks targeted by Irving Picard, the liquidation trustee for Bernard Madoff’s defunct investment firm.

In a decision that could have major implications for overseas financial institutions caught up in U.S. bankruptcy proceedings, Rakoff ruled that U.S. courts can’t hear many of the so-called avoidance actions Picard has brought on behalf of Madoff’s Ponzi scheme victims. Sunday’s ruling wipes out roughly 80 separate actions brought by Picard, including cases against Unicredit SA and BNP Paribas SA.

Picard has sought to undo, or “avoid,” payments made by Madoff’s investment company so that the cash can be redistributed among victims. But nothing in the language of the U.S. Bankruptcy Code’s avoidance provisions suggests that Congress intended them to apply to “thoroughly foreign” transactions involving overseas entities, Rakoff wrote, citing the strong presumption against extraterritoriality that the U.S. Supreme Court emphasized four years ago in Morrison v. National Australia Bank.

Before its unraveling in 2008, Bernard L. Madoff Investment Securities (BLMIS) made periodic payments to two offshore feeder funds, Fairfield Sentry and Harley International (Cayman). These foreign funds subsequently transferred the money to banks that managed money on behalf of Madoff investors. Some of these banks, including UniCredit and JPMorgan Chase & Co., have been accused of roping in Madoff victims and facilitating his fraud.

Picard, a partner at Baker & Hostetler who was appointed to oversee the liquidation of BLMIS, has so far clawed back about $10 billion for Madoff investors. In addition to avoidance actions, he’s also brought racketeering and aiding and abetting claims against banks that partnered with Madoff. JPMorgan settled various claims brought by Picard for $325 million in January 2014.

Since 2012, Rakoff has identified about 80 of Picard’s avoidance actions involving transfers between foreign entities. Rakoff ordered the banks targeted in those 80 actions—UniCredit, BNP Paribas, ABN AMRO NV, among others—to file a single joint motion on their extraterritoriality defense.

Skadden, Arps, Slate, Meagher & Flom; Cleary Gottlieb Steen & Hamilton; and Sullivan & Worcester took the lead on drafting the motion. (They represented UniCredit, BNP Paribas and Unicredit’s Bank of Austria unit, respectively.) Franklin Velie of Sullivan & Worcester made the case for all of the defendants at a September 2012 oral argument.

After a long wait, Rakoff sided with the banks in Sunday’s ruling, concluding that Picard can’t pursue avoidance claims related to foreign transactions between foreign entities. Picard hadn’t put a dollar value on most of his avoidance claims, but the cases affected by the ruling likely involve many billions of dollars.

If Rakoff’s ruling holds up on appeal, Picard will be out of options for prevailing over foreign banks targeted in Madoff-related litigation. Rakoff dismissed Picard’s racketeering case against UniCredit in 2012. And the U.S. Court of Appeals for the Second Circuit has held that Picard doesn’t have standing to bring common law aiding and abetting claims against third-party banks including HSBC Bank plc, UBS AG and UniCredit. Last month the U.S. Supreme Court refused to hear Picard’s challenge to the Second Circuit’s decision, derailing those cases for good.

Velie said in an interview that he’s gratified by Rakoff’s ruling.