(Bloomberg News) The liquidator of Bernard Madoff's firm will try to salvage his $1 billion lawsuit against New York Mets owners Fred Wilpon and Saul Katz this month after a judge ruled in another case that he can't stray too far from bankruptcy law.

U.S. District Judge Jed Rakoff last week threw out almost $9 billion in damages that Madoff trustee Irving Picard demanded from HSBC Holdings Plc and feeder funds, while saying he was free to pursue $2 billion in bankruptcy claims. The liquidator has no right to sue on behalf of customers or the Madoff estate using common-law claims against parties "who allegedly violated a duty to Madoff Securities' customers by failing to detect Madoff's fraud," Rakoff ruled.

Picard said in a July 22 court filing that he demanded the $1 billion from the Mets owners using only bankruptcy laws that allow debtors to take money back from lenders and investors. That includes $300 million in fictitious profit and $700 million in principal, which Picard claimed they owed him because they didn't probe signs of fraud at Madoff's firm.

His claim on the principal may not survive if Rakoff rejects the theory that investors have a duty to investigate their money managers. The Mets owners may not have had a legal duty under federal law to investigate whether Madoff was running a fraud, Rakoff said at a July 1 court hearing.

Amanda Remus, a Picard spokeswoman, declined to comment on Rakoff's remarks.

"If Rakoff rules that there wasn't a duty to investigate, and appeal judges agree, Picard at best will get $300 million from the Mets owners," said Chip Bowles, a bankruptcy lawyer at Greenebaum Doll & McDonald PLLC in Louisville, Kentucky, who isn't involved in the case.

'Tunnel Vision'

At the July 1 hearing, Rakoff said he would take the Mets owners' case out of bankruptcy court to decide the issue of duty, acceding to a request by the owners of the Major League Baseball team. The Mets owners are due to reply to the trustee on Aug. 12, before a court hearing on Aug. 19.

"It doesn't seem to me to be self-evident that bankruptcy law sets the duty of inquiry that a customer of a brokerage has," Rakoff said. One danger of specialized courts is "something of a tunnel vision," he said.

Picard and his law firm, Baker & Hostetler LLP, have collected about $179 million in fees for work since Madoff's 2008 arrest. Madoff, 73, is serving a 150-year sentence in a federal prison in North Carolina.

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