Jeffrey Picower, who profited from his investments with Bernard Madoff to the tune of $7 billion, was found dead in his bathing suit at the bottom of his private Florida swimming pool in October 2006. His family agreed to return the $7 billion after his death as part of a settlement of a fraudulent transfer of assets lawsuit brought by the Madoff trustee for the benefit of Madoff’s victims. The $7 billion, which includes a payment to the government, is a significant portion of the funds available for distribution to the victims of Madoff’s Ponzi scheme.

The Picower’s settlement with the trustee included an injunction protecting the Picower family from any direct claims by individual Madoff creditors once its settlement with the trustee was finalized. The Madoff bankruptcy court approved the settlement, and, consistent with the terms of the settlement, also ruled that two class actions brought by Florida residents in Florida against the Picowers to recover for Madoff losses were barred by the terms of the settlement, as well as by the automatic stay provision of the Bankruptcy Code.

The Florida plaintiffs appealed to Judge Koeltl in In re Madoff. They argued that they should be able to sue the Picowers directly because their claims against the Picowers were “independent” of the trustee’s, and were not the “property of the estate” subject to the trustee’s exclusive rights. Judge Koeltl upheld the bar of the Florida actions. He held that the Florida actions were substantively identical to the claims initially brought by the trustee (even though they were denominated as tort claims instead of fraudulent transfer claims), and that the Florida plaintiffs did not allege the violation of any duty to them by Picower that was not shared by the other creditors of the Madoff estate. Accordingly, the claims properly belonged to the Madoff estate and the trustee, and the Florida actions were barred. In any event “[a]llowing the Florida Actions to go forward would carry real risks to the estate, implicating the viability of the current settlement and the possibility of future settlements . . . .”

Judge Koeltl’s opinion also contains a very informative discussion of the applicability of the doctrine of in pari delicto to claims brought by a bankruptcy trustee. In cases where the bankrupt company engaged in misconduct, that defense operates under principles of agency to make a trustee subject to the same defenses as could be asserted against the company — even where the trustee is seeking to maximize the estate for creditors. The plaintiffs argued that their claims were distinguishable from the trustee’s because they were not subject to an in pari delicto defense. But Judge Koeltl found that the defense did not apply to claims that the trustee had a statutory right to bring, like fraudulent transfer claims against Mr. Picower. Otherwise, creditor-plaintiffs could obtain “judgments without the bankruptcy system, based on claims that are derivative or duplicative of claims that are property of the estate.”