A planned $800 million settlement between one of the largest investors in the Bernard L. Madoff Ponzi scheme and the trustee recovering funds for Madoff investors has collapsed, people familiar with the matter said.

The deal between Kingate Management, a feeder fund to Madoff's firm, and bankruptcy trustee Irving Picard fell apart after the Justice Department this week announced its decision to exclude such funds from payouts out of the agency's $2.35 billion Madoff Victim Fund, which is overseen by Richard Breeden.