By Jonathan Stempel
NEW YORK (Reuters) - Two former clients of Bernard Madoff urged an appeals court to revive their claims against the estate of a Florida businessman who had been one of the money manager's biggest clients, in a battle with a trustee over recoveries from the Ponzi scheme.
The case before the 2nd U.S. Circuit Court of Appeals in Manhattan centered on the authority of trustee Irving Picard, who is liquidating Madoff's firm, to reach settlements that let victims recover some of their money.
At a hearing on Thursday, lawyers for Adele Fox and Susan Marshall asked the 2nd Circuit to undo an injunction that blocked them from going ahead with their own claims against the estate of Jeffry Picower. The trustee's $7.2 billion settlement with Picower's estate in 2010 is the largest for victims of Madoff's fraud.
Fox and Marshall argued that the settlement, which was upheld by two lower court judges, improperly prohibited them from pursuing their own independent lawsuit against Picower.
Picard has said that Picower, who drowned in 2009, knew or should have known that Madoff was running a scam. Picower's widow at the time of the settlement said she was "absolutely confident" that her husband was not complicit, and noted that he was not charged with illegal conduct.
The appeal is challenging an injunction that was imposed by a bankruptcy judge, and upheld in a March 26 ruling by U.S. District Judge John Koeltl that also upheld the $7.2 billion settlement.
About $5 billion of the settlement was destined for the estate of Bernard L. Madoff Investment Securities LLC, and $2.2 billion was to be forfeited the government.
At Thursday's hearing, Circuit Judge Susan Carney asked Marshall's lawyer Peter Smith whether the "immense" size of the Picower estate payout justified releasing it from other claims, including a claim that Picower conspired in Madoff's fraud.
Smith said no, adding that the injunction could bar many Madoff victims from recovering at all, in light of a June order by the U.S. Supreme Court that upheld Picard's methods for deciding what they are owed.
"I reject the idea that just because the Picowers paid $7.2 billion they are entitled to a release," Smith said.
Lisa Blatt, a lawyer for Fox, said her client's claims against Picower differed from Picard's, and that Picower had a different role than Madoff in the fraud.
"It's like a bank who wants to sue the getaway driver" in a robbery though his accomplice holds all the cash, Blatt said. "He's still liable."
Madoff, 74, is serving a 150-year sentence in a North Carolina federal prison.
David Sheehan, a lawyer for Picard, countered that allowing Fox's and Marshall's claims could trigger a frenzy of lawsuits among investors and intermediaries linked to Madoff.
He also told Circuit Judge Jose Cabranes that similar lawsuits would complicate efforts to reach settlements and obtain recoveries for victims of the Ponzi scheme.
Giving the trustee power to reach comprehensive settlements ensures finality, he said. "Without that opportunity to bring closure, we are disarmed," he said.
Picard has largely been successful in beating back legal challenges to his authority to recover money for Madoff investors and decide how much each deserves.
He has recovered $9.28 billion for Madoff victims, excluding the $2.2 billion in the government forfeiture. About $2.89 billion has been distributed.
Fox had two accounts with Madoff with final balances of $2.84 million. Picard denied her claims because she withdrew more money than her principal investment.
Marshall's final account statement showed a $203,000 balance. She received $30,000 from Picard in August 2009.
The cases are Marshall et al v. Picard, 2nd U.S. Circuit Court of Appeals, Nos. 12-1645, 12-1646, 12-1651, 12-1669, 12-1703.
(Reporting by Jonathan Stempel in New York; Editing by Martha Graybow and Maureen Bavdek)