By Jonathan Stempel
NEW YORK (Reuters) - In a setback for the trustee seeking money for former customers of fraudster Bernard Madoff, a U.S. appeals court refused to void two settlements benefiting investors who sued "feeder funds" that sent their money to Madoff.
Friday's unanimous decision by a three-judge panel of the 2nd U.S. Circuit Court of Appeals in New York leaves intact a $410 million settlement with J. Ezra Merkin, a Wall Street hedge fund manager who oversaw the Ariel Fund Ltd and Gabriel Capital LP, and an $80 million settlement with Fairfield Greenwich Ltd.
The Merkin settlement had been negotiated by New York Attorney General Eric Schneiderman and also resolved claims by Bart Schwartz, the receiver of the Ariel and Gabriel funds.
Irving Picard, the trustee liquidating Bernard L. Madoff Investment Securities LLC, claimed the settlements impeded his ability to recoup fraudulent transfers that Madoff made to Merkin and Fairfield, and which belong to the firm's estate.
Writing for the appeals court, however, Circuit Judge Robert Sack said Picard "is incapable of establishing either that the settlements would in fact have an immediate adverse economic consequence for the BLMIS estate, or that the estate is likely to suffer irreparable harm" if the settlements go ahead.
Amanda Remus, a spokeswoman for Picard, said the trustee is reviewing the decision, and will keep pursuing his own cases related to Merkin and Fairfield in Manhattan bankruptcy court.
The decision upheld rulings last year by U.S. District Judges Jed Rakoff and Victor Marrero allowing the respective Merkin and Fairfield settlements.
"This ruling is a victory for justice and accountability," Schneiderman said in a statement.
Merkin's lawyer Andrew Levander said he is pleased with the decision, and that his client's former investors, which include charities, "should now be able to participate in the settlement in the near future."
Picard has recovered $9.83 billion for Madoff customers who lost roughly $17.5 billion of principal in a decades-long scheme that collapsed in 2008.
Madoff, 76, is serving a 150-year prison term.
Picard had argued that he could block the Merkin and Fairfield settlements under an "automatic stay" provision in federal bankruptcy law, and a separate federal law protecting investors of failed brokerages.
But Sack said Picard had no legal right to any Merkin or Fairfield assets, and that the stay did not cover disputes over whether the feeder funds breached duties to their own investors.
Sack also said it was only "factually likely, as opposed to legally certain," that the settlements affected the Madoff firm's estate at all.
"The decision makes clear that a trustee like Irving Picard doesn't have the ability to block litigation or settlements of separate claims brought by investors that arise from a complex fraud," said Stuart Singer, a lawyer representing Fairfield investors.
In March, the 2nd Circuit heard arguments on how much of the "fictitious profits" that Madoff sent to selected customers may be clawed back by Picard. It has yet to rule.
The cases are Picard v. Fairfield Greenwich Ltd et al, 2nd U.S. Circuit Court of Appeals, No. 13-1289; and Picard v. Schneiderman et al in the same court, No. 13-1785.
(Editing by Grant McCool)