Lawyers for New York Attorney General Eric Schneiderman and the trustee overseeing the liquidation of Bernard Madoff’s Ponzi scheme will square off in federal court this afternoon over the attorney general’s $410 million settlement with Ezra Merkin and the funds he managed that invested with Madoff.

Merkin’s attorneys will also appear at the hearing in Picard v. Schneiderman, 12-6733, which is set for 4 p.m. today before Southern District Judge Jed Rakoff.

The trustee, Irving Picard of Baker & Hostetler, is asking for an injunction blocking a settlement reached by the attorney general last June over allegations that Merkin’s funds simply funneled investors’ money into Bernard L. Madoff Investment Securities, and that Merkin knew or should have known about Madoff’s scheme. Merkin did not admit or deny any wrongdoing as part of the settlement.

Picard claims the $410 million settlement properly belongs to the Madoff bankruptcy estate and should be available for distribution to all creditors, not just the investors in the Merkin funds.

The dispute heated up on March 5, when the attorney general filed a brief jointly with receivers now in charge of Merkin’s funds—Gabriel Capital, Ariel Fund and Ascot Partners. Merkin, represented by Andrew Levander of Dechert, also filed a separate brief.

The attorney general and the receivers argue in their strongly worded brief that, even if the trustee is successful, the funds would still be large net losers from Madoff’s scheme, meaning that in the end they would be owed money and the trustee would have no net recovery.

Both briefs also blasted the trustee for exceeding the authority granted to him by the bankruptcy code.

"This action is the Trustee’s latest attempt to expand his authority beyond the law," the attorney general and receivers said in their reply. "The Trustee ignores rulings, long-held legal precepts and notions of equity, that prevent him from enjoining the NYAG settlement.

"There is no precedent for enjoining a law enforcement agency from bringing and settling a case against a non-debtor, based on claims that do not even conceivably belong to the bankruptcy estate, and from obtaining money from the non-debtor that is not property of the bankruptcy estate," the attorney general’s brief said. "In fact, the Bankruptcy Code’s automatic stay provision expressly exempts actions by governmental agencies, such as the NYAG, from its reach."

Furthermore, the attorney general argued, much of Merkin’s money did not even come from Madoff’s scheme, or was earned before the two-year window in which the trustee can seek to recover from Madoff investors.

"The injunction would also deny the NYAG access to funds to which the Trustee has no entitlement," the brief said. "Merkin’s assets derive from multiple sources, the vast majority of which the Trustee has no basis to even make a claim were fraudulently transferred."

The brief further attacked the trustee for making the "absurd, abusive and reckless" accusation that the settlement, which provides for a $5 million payment to cover the attorney general’s legal costs, was meant to "fill New York State’s coffers."

"The $5 million payment, about one percent of the settlement amount, is a routine, conventional provision of a type often contained in settlements by the NYAG, the SEC, and other agencies," the brief said.

"To date, the Trustee and his counsel have billed and received substantially more to litigate his own case against Merkin," the brief added, alluding to the fees of well over half a billion dollars so far collected by Picard.

Finally, the attorney general and the receivers argued that the settlement is in the interest of justice.

"The NYAG action has resulted in a large settlement that holds Merkin accountable," it said. "If the Settlement is set aside, or the NYAG action voided, Merkin will never be held accountable."

Merkin’s brief took issue with Picard’s claim that he knew about Madoff’s scheme and had none of his own family’s money invested in it. It said that his family had $110 million invested with Madoff.

"There is absolutely no basis for the Trustee’s outrageous accusation that the Merkin Defendants had ‘actual knowledge of fraud by BLMIS—in particular, knowledge that it was a Ponzi scheme,’" Merkin’s brief said, quoting an earlier filing by Picard.

Merkin also criticized the trustee for suggesting, in an earlier filing that he might decide not to pay anything to Merkin’s funds.

"Whatever discretion the Trustee has in the administration of the SIPA proceeding, there is no authority for his refusing to recognize a customer of the brokerdealer or pay the customer claim simply because he does not like the customer or believes it undeserving of customer status, and none of the cases he cites support the Trustee’s contention," it said.

The attorney general is represented by Assistant Attorney General David Ellenhorn, who declined to comment.

Picard is represented by David Sheehan of Baker & Hostetler, who could not be reached.

Levander could not be reached for comment.