In the latest decision to emanate from the Madoff bankruptcy, the United States District Court for the Southern District of New York denied the appeal of a protective order that relieved Irving Picard—the court-appointed trustee—from answering discovery requests regarding his compensation arrangement with his law firm.

Mr. Picard, in connection with the liquidation of Madoff’s business, filed numerous actions seeking to claw back funds from those investors who were “net winners,” meaning they withdrew more money from their Madoff accounts than they deposited into them. In response, certain defendants filed motions to dismiss arguing a violation of the Fifth Amendment’s due process clause on the basis that Mr. Picard is a quasi-governmental official and, because of his compensation arrangement, he may have had an economic interest in pursuing the litigation. The United States Bankruptcy Court for the Southern District of New York denied the defendants’ due process argument. The defendants’ request for an interlocutory appeal to the district court was also denied, in part because the defendants provided “no settled factual record for [the] Court to consider on the issue of the Trustee’s compensation.” In an attempt to remedy this apparent deficiency, the defendants served interrogatories focused on Mr. Picard’s compensation. The bankruptcy court entered a protective order relieving Mr. Picard of any obligation to answer these interrogatories and the defendants sought an interlocutory appeal from the protective order.

Analysis

Although 28 U.S.C § 158(a)(3) provides a district court discretionary appellate jurisdiction over an interlocutory order of a bankruptcy court, appellate review is only warranted in exceptional circumstances. To determine if leave to appeal should be granted, courts generally assess whether (i) the appeal involves a controlling question of law (ii) hearing the appeal would materially advance the ultimate termination of the litigation, and (iii) there is substantial ground for difference of opinion.

The court found that although the first two criteria for an interlocutory appeal were satisfied, the appellants failed to show any substantial ground for difference of opinion on the question of whether Mr. Picard is a “state actor” for due process purposes. The court analogized Mr. Picard’s powers, which include collecting money for the debtor’s estate and investigating its financial affairs, to those of a bankruptcy trustee. Courts have routinely found that a bankruptcy trustee is a representative of the estate rather than an arm of the government and appointment by the government is not sufficient to convert a bankruptcy trustee into a state actor. The court was unpersuaded by cases cited by the appellants involving state-appointed receivers that were found to be state actors because these cases involved allegations that the receivers had abused their powers. All of the other cases cited by the appellants involved the conduct of “canonical state actors, like prosecutors or judges.” The court held that the appellants had not established a substantial ground for difference of opinion on the question of whether Mr. Picard in filing avoidance actions attained the status of a state actor.

The court denied Mr. Picard’s request for sanctions. Mr. Picard argued that sanctions are justified because the appellants simply recycled a variation of an argument from previous litigations where it was also denied. The court, however, found that sanctions were not appropriate because the appellants appear to have interpreted the previous order denying their interlocutory appeal to direct them to develop a factor record with respect to Mr. Picard’s compensation. The request for discovery and subsequent appeal may be construed as a good-faith attempt to comply with this order.

Conclusion

This case is another reminder that courts generally require finality for a matter to be appealable. Interlocutory appeals are generally disfavored by courts and are only appropriate in exceptional circumstances.