Irving Picard, the court-appointed bankruptcy trustee in the Chapter 7 bankruptcy case of Bernard Madoff and his company Bernard L. Madoff Investment Securities Inc., is suing JPMorgan Chase & Co. for $6.4 billion on behalf of the victims of Madoff’s $65 billion Ponzi scheme. It is one of numerous bankruptcy “look-back” lawsuits Picard has filed against individuals and companies he says benefitted from turning a blind eye to Madoff’s misdeeds.

JPMorgan Chase is not taking that accusation lying down. This week, Chase fired back, accusing Picard of exceeding his authority as a bankruptcy trustee by “trying to pursue an enormous back-door class action.”

Chase has asked the bankruptcy judge to force Picard to re-file the look-back lawsuit in federal district court. Once there, Chase plans to demand a jury trial.

Chapter 7 look-back lawsuits also filed against Citibank, Merrill Lynch, other investors

Shortly after Bernard Madoff’s massive investment fraud was discovered, the former Wall Street titan and his investment firm were forced into involuntary bankruptcy in 2009. His Chapter 7 personal bankruptcy was consolidated with the Chapter 7 business bankruptcy of his company, and Picard was appointed bankruptcy trustee over the case.

The job of a Chapter 7 bankruptcy trustee is to ensure that all of the debtor’s qualifying assets are accounted for, liquidated and distributed to creditors according to legal rules. Accounting for the assets, however, can sometimes be a challenge.

In some cases, debtors try to avoid losing all of their assets by giving them to friends or relatives just before filing for bankruptcy, which is a form of bankruptcy fraud. In other cases, debtors knowingly or innocently pay off some of their debts just before filing, leaving fewer assets to be used to pay off the remaining creditors.

To make sure that all creditors are treated fairly, bankruptcy trustees are given the power to look into all financial transactions debtors made for a certain period of time before they filed. If they find any assets that should have been included in the bankruptcy, trustees can file “look-back” lawsuits to reclaim those assets.

As we reported in December, Picard has filed look-back lawsuits against a number of individual investors and banks who received transfers from Madoff Investment Securities or its feeder funds before the bankruptcy. Picard claims that many of the investors knew or should have known they were receiving ill-gotten gains but turned a blind eye.

Chase says that Picard’s allegations go beyond those expected of a Chapter 7 bankruptcy trustee. Rather than reversing transactions that were intended to defraud the bankruptcy estate, Picard is trying to reverse transactions that — even if they were improper — had nothing to do with Madoff’s bankruptcy.

Chase denies knowing about Madoff’s fraud, assisting in it, or intentionally benefitting from it.

U.S. Bankruptcy Judge Burton Lifland has not yet ruled on JPMorgan Chase’s petition.

Source: Westlaw News & Insight, “JPMorgan fires back in $6.4 billion Madoff lawsuit,” Jonathan Stempel, Santosh Nadgir and Jeff Roberts, February 9, 2011