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Not So Fast, Mrs. Madoff

As reported by Ashby Jones at the WSJ Law Blog, the trustee for the consolidated cases of Bernie Madoff and his investment firm commenced an adversary seeking more than $44 million from Ruth Madoff earlier today. This action does not surprise me as much as it seems to surprise Mr. Jones; to the contrary, it makes a lot of sense.

First, regardless of whatever deal Ruth Madoff has with prosecutors, this action is being brought under entirely different authority (primarily, federal bankruptcy and state fraudulent transfer laws). Her deal with prosecutors recognizes this much and does not purport to interfere with this sort of suit by the trustee.

Second, this is an important aspect of the trustee's duties to the creditors of Mr. Madoff and his firm. By this suit, the trustee should be able to (a) get whatever assets Mrs. Madoff may have at her disposal that should be turned over to the estates and (b) prevent Mrs. Madoff from obtaining any recovery on her proof of claims in those cases unless she turns over the full amount she may owe the bankruptcy estates. This is not only an important technical function of bankruptcy law (marshaling assets for distribution to creditors); in such a high profile case, it serves an equally important role in maintaining public confidence in the bankruptcy system. Indeed, Bernie Madoff's victims and many in the general public are angry enough that she gets to keep $2.5 million; imagine the furor if she could also dilute the victims' recovery as a creditor without being forced to pay back anything she owes the estates first.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.