Irving Picard has given the bankruptcy laws one hell of a workout. As trustee in the Chapter 7 bankruptcy of Bernard Madoff's securities firm, Picard, a partner at Baker & Hostetler, has been more aggressive and creative than any bankruptcy trustee in history in the search for defendants to blame for Madoff's epic Ponzi scheme. His most ambitious gambit, as everyone knows, was a series of megabillions suits against the international financial institutions that Picard's team of lawyers at Baker & Hostetler lawyers accused of willfully ignoring warnings of Madoff's fraud.

The trustee's suits were provocative headline-grabbers -- and on Tuesday, a second Manhattan federal judge concluded that they're fatally flawed. U.S. District Court Judge Colleen McMahon dismissed Picard's common law tort claims against JPMorgan Chase and UBS (and related defendants), finding that Picard does not have standing. Her ruling expands and reinforces a previous decision on the same issue by her Manhattan federal court colleague Judge Jed Rakoff, who in July dismissed Picard's common law claims against HSBC and UniCredit. Tuesday's decision wipes out about $20 billion in alleged damages, leaving Picard with about $450 million in traditional bankruptcy court clawback claims against JPMorgan and about $80 million in bank fee claims against UBS. (CORRECTION: The original version of this post did not make clear that the $80 million figure is for bank fees.) It's a huge win for JPMorgan's lawyers at Wachtell, Lipton, Rosen & Katz -- who were actually the first lawyers to ask a federal district court judge to hear one of Picard's cases -- and for UBS's lawyers at Gibson, Dunn & Crutcher.

But now the question is whether Picard's allegations that these global banks helped Madoff perpetuate his scheme are dead. The answer is, not quite. The trustee's spokesperson has already announced that Picard's team from Baker & Hostetler intends to appeal McMahon's ruling to the 2nd U.S. Circuit Court of Appeals; the trustee has already filed a notice of appeal of Rakoff's decision. Moreover, as both McMahon and Rakoff discussed in their opinions, Madoff's customers have the standing Picard lacks. Some enterprising plaintiffs lawyer could certainly capitalize on Picard's spade work and file a class action against the banks on behalf of Madoff victims.

But I don't think the odds are good for either the 2nd Circuit appeal or a class action.

Let's first consider the problems a class action would face. If Madoff victims claimed the banks helped the Ponzi scheme break federal securities laws, they'd have to overcome U.S. Supreme Court rulings that limit the reach of securities laws to alleged aiders and abettors. To get to the banks, victims would have to show that their Madoff investments relied on the banks' endorsement of him, an unlikely scenario given the banks' indirect relationship with Madoff customers. To show securities fraud, customers would also have to show that the banks acted with fraudulent intent, another tough sell since aiding a Ponzi schemer isn't a good long-term business plan. And if customers tried to bring state or common-law fraud claims, they'd face Securities Litigation Uniform Standards Act pre-emption. Add in forum non conveniens and Morrison v. National Australia Bank defenses for the foreign institutions, and potential statute of limitations defenses for all of the banks, and you have a very uncertain case. It's probably not an oversight that no one has yet filed a class action against the banks for Madoff customers.

So what about Picard's appeal to the 2nd Circuit? (As a preliminary matter, it's not clear that Picard has an automatic right to appeal; he may have to ask Rakoff and McMahon to certify the issue of the trustee's standing for 2nd Circuit consideration.) Both Rakoff and McMahon are well-respected judges, and both of their opinions concluded the standing issue isn't even a close call. McMahon endorsed Rakoff's reasoning for why Picard doesn't have standing under the Bankruptcy Code or the Securities Investor Protection Act -- a bankruptcy trustee is only empowered to bring the claims that belonged to the estate, not to its customers. And Madoff's now-defunct firm, both judges found, can't sue the banks for abetting its own fraud under the doctrine of in pari delicto.

McMahon also agreed with Rakoff that Picard's contribution theory -- in which Picard asserted he can bring tort claims against the banks because he, in turn, has an obligation to Madoff customers -- doesn't hold up; both judges said SIPA doesn't give him that power, under a contribution, subrogation, or bailment theory. (If you want more details on these theories, I previously discussed them in a post about Rakoff's ruling.)

Picard's Baker lawyers added a new argument for the trustee's standing in the case against JPMorgan and UBS after Rakoff's ruling in July. Under a provision of the Bankruptcy Code, they asserted, the trustee has the rights of a "judgment creditor," which is a lender to the estate at the time it files for bankruptcy. The Code, in the 10th Circuit's description, "permits the trustee ... to assume the guise of a creditor with a judgment against the debtor," which means the trustee can turn to state law remedies to satisfy that judgment. Picard said the provision permitted him to step into the shoes of Madoff creditors -- defrauded brokerage customers -- to bring claims against UBS and JPMorgan. (The trustee didn't make this argument before Rakoff, and, in fact, didn't make the argument in opposing the banks' move out of bankruptcy court and into federal district court.)

McMahon resoundingly rejected the new argument. "The problems with this theory are legion," she wrote. "Foremost is that its conclusion -- the trustee is empowered to pursue the pre-petition common-law claims of actual creditors -- does not follow from its premise -- that the trustee has the powers of a judgment creditor... The trustee does not argue that New York law allows a judgment creditor to seek recovery against a debtor by appropriating causes of action against third parties that belong not to the debtor but to the debtor's other creditors. Nor could he; the result would be preposterous." (This language is the strongest in McMahon's otherwise very moderate opinion.)

Picard's best hope for success at the 2nd Circuit probably lies with an old ruling by the very same court. In a 1978 case called Redington v. Touche Ross, a divided 2nd Circuit panel found that a liquidation trustee does have right to bring claims on behalf of a brokerage's customers. The U.S. Supreme Court subsequently overturned the Redington ruling on other grounds, so the 2nd Circuit's finding on the trustee's standing has been in a sort of weird judicial limbo. In his ruling in July on Picard's standing, Rakoff cited a previous ruling by Manhattan federal judge Milton Pollack in holding that Redington is no longer good law. (He also said that even if it were, the ruling wouldn't confer standing on Picard in the Madoff cases because the facts aren't parallel.)

McMahon's ruling Tuesday includes a more thorough analysis of why Redington is no longer 2nd Circuit precedent, as if the judge were anticipating Picard's eventual appeal. ("Let me elaborate further on Judge Rakoff's discussion," she wrote.) The judge said that the threshold issue in the Redington case was not actually the trustee's standing, but whether federal law provided a private right of action against Touche Ross under the Securities Act. The 2nd Circuit made a mistake, according the Supreme Court, in concluding there was a claim under federal law, McMahon reasoned. So the appeals court never should have gotten to the question of the trustee's standing. "Once the Supreme Court told the 2nd Circuit that no private right of action existed under federal law, whatever the 2nd Circuit said about standing was rendered superfluous," she wrote. "Its finding on standing should never have been made.... Whatever [the 2nd Circuit's] reasoning in the court of (erroneously) reaching the standing question surely cannot bind a lower court."

If the 2nd Circuit decides to reinstate Picard's claims, in other words, it will have to repudiate very thoughtful analysis by two smart, careful trial judges. But the Madoff litigation is groundbreaking, and Picard's team is endlessly resourceful. I can't wait to see their next move.

(Reporting by Alison Frankel)