Judge Jed S. Rakoff last week largely sided with Fred Wilpon and Saul Katz, the owners of the New York Mets, and their families and affiliated enterprises (the “Wilpon/Katz Group”) on their motion to dismiss the adversary proceeding brought by Irving Picard, the trustee of Bernard L. Madoff Investment Securities LLC (“BLMIS”). Judge Rakoff’s decision will affect not only this particular lawsuit, but also many of the other lawsuits Picard has commenced seeking the recovery of funds from former investors of BLMIS. (Kelley Drye & Warren LLP represents other Madoff investors who may benefit from this ruling.)  

Judge Rakoff dismissed most of the counts against the Wilpon/Katz Group based on his reading of the “safe harbor” provisions Section 546(e) of the Bankruptcy Code. That section limits a trustee’s powers to recover any transfer from a “stockbroker” that was a “settlement payment” made “in connection with a securities contract” to transfers made with actual fraudulent intent.  Crucially, this interpretation of 546(e) only permits a recovery of intentionally fraudulent transfers pursuant to Section 548(a)(1)(A) of the Bankruptcy Code, which has a two-year look back period. It completely eliminates Picard’s ability to rely on the six-year look back period under New York state law fraudulent transfer provisions. 

The ruling constitutes a huge victory for the Wilpon/Katz Group. In addition to substantially reducing Picard’s potential recovery by reducing the look back period from six years to two years, Judge Rakoff set a very high standard for Picard to meet in order to recover any payments other than “fictitious profits”. As has been widely-publicized, Picard has sought the return of all transfers made from BLMIS to the Wilpon/Katz Group, including those that constituted the return of invested principal, due to a lack of “good faith”, based on the so-called “red flags” that Picard believes should have given the Wilpon/Katz Group reason to suspect Madoff. In Judge Rakoff’s view, however, Picard can only recover payments evidencing a return of principal by showing a lack of good faith tantamount to “willful blindness”.    

Judge Rakoff did leave open one issue that could somewhat mitigate the Wilpon/Katz Group’s victory here. Although the “fictitious profits” they received from BLMIS during the two year look back period totaled $83 million, Rakoff stated in a footnote that he would not resolve “whether the Trustee can avoid as profits only what the defendants received in excess of their investment during the two year look back period . . . or instead the excess they received over the course of their investment with Madoff.” In a separate order issued the following day, directing the parties to set a briefing schedule, he elaborated, “[T]he total of all transfers made during the two-year [look back] period . . . appears to be $386 million. However, it remains an open question whether, in determining what portion of that sum should be considered principal and what portion profits, reference should be made only to that period or should be made to earlier transfers as well.”   

An appeal by Picard is a near-certainty. Even if Picard and the Wilpon/Katz Group reach a settlement, it will affect too many other adversary proceedings brought by Picard for him to let stand. The Second Circuit Court of Appeals recently handed Picard a major victory by rejecting the ability of Madoff investors to rely on the fabricated account statements for the purpose of asserting claims against the BLMIS estate. He will undoubtedly look to try his luck there again.