Southern District Judge Jed S. Rakoff has narrowed the $1 billion lawsuit brought by bankruptcy trustee Irving Picard as he seeks to recover money that the owners of the New York Mets received in the Bernard L. Madoff Ponzi scheme. In an 18-page opinion yesterday, the judge dismissed all claims against Fred Wilpon and Saul Katz save those alleging actual fraud and equitable subordination. Thrown out were claims under New York law and “all claims predicated in principles of preference or constructive fraud under the Bankruptcy Code.” The judge also narrowed the standard of recovery under the remaining claims for Mr. Picard of Baker & Hostetler, who is charged with liquidating Bernard L. Madoff Investment Securities.

The “literal language” of the Bankruptcy Code, Judge Rakoff said, “precludes the trustee from bringing any action to recover from any of Madoff’s customers any of the monies paid by Madoff Securities to those customers except in the case of actual fraud.” Under that count, Count 1, he said, “the Trustee may recover defendants’ net profits simply by proving that the defendants did not provide value for monies received, but the Trustee may recover the return of the defendants’ principal only by proving that the defendants willfully blinded themselves to the fraud.” The judge said “the Trustee can subordinate the defendants’ own claims against the estate only by making the same showing required under Count 1 or its equitable equivalent.”

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