At the end of the day, Picard really did not have a case, but there was no way that Wilpon and Katz could risk a trial. It looks to be a fair and reasonable outcome.
At the end of the day, Picard really did not have a case, but there was no way that Wilpon and Katz could risk a trial. It looks to be a fair and reasonable outcome.
On the surface, Irving Picard, the trustee of Bernard L. Madoff Investment Securities LLC (“BLMIS”), had a very good day. Judge Jed S. Rakoff granted Picard’s motion for summary judgment against Fred Wilpon and Saul Katz, the owners of the New York Mets, and their families and affiliated enterprises (the “Wilpon/Katz Group”) with respect to the $83 million of fictitious profits received by the Wilpon/Katz Group in the two year period before the filing of the BLMIS case. At the same time, Judge Rakoff denied the Wilpon/Katz Group’s summary judgment motion that sought to prevent Picard from clawing back any payments other than fictitious profits on the grounds that he could not prove that the Wilpon/Katz Group acted in bad faith in investing in BLMIS.
The Wilpon/Katz Group can take some comfort, however, from Judge Rakoff’s blunt skepticism regarding Picard’s ability to recover any further amounts. The ruling with respect to fictitious profits was hardly a surprise. In a ruling last September, Judge Rakoff had issued what amounted to a virtually gold-plated invitation when he said, “[T]he Trustee might well prevail on summary judgment seeking recovery of [such] profits.” However, with respect to the $300 million of invested principal that the Wilpon/Katz Group received from BLMIS during the two year period, Judge Rakoff reiterated his earlier expressed doubts in even stronger terms, stating that Picard’s efforts to demonstrate bad faith amounted to “nothing but bombast.”
The trial is scheduled to begin in two weeks on March 19. At this point, however, a settlement very likely makes sense for both parties. Although Picard has virtually no chance of recovering invested principal, Rakoff is going to allow him to present his evidence with respect to bad faith to a jury. The Wilpon/Katz Group, even if victorious after what will undoubtedly be an embarrassing and widely publicized trial, will thereafter face a lengthy appeal period. Picard has been successful before the Second Circuit, and may very well prevail in his appeal of Judge Rakoff’s earlier ruling from last September that, among other things, reduced the amount of fictitious profits which could be recovered from approximately $295 million.
The mediation efforts of former Governor Mario Cuomo may yet succeed.
Irving Picard, the trustee of Bernard L. Madoff Investment Securities LLC (“BLMIS”), and Fred Wilpon and Saul Katz, the owners of the New York Mets, and their families and affiliated enterprises (the “Wilpon/Katz Group”), each submitted their final arguments last week in support of their respective motions for summary judgment. As previously discussed on this site, Judge Jed S. Rakoff’s rulings on the motions could largely resolve this year-long legal battle.
Judge Rakoff’s decision last September dismissed most of the counts set forth in Picard’s complaint and substantially narrowed the focus of Picard’s adversary proceeding. Section 548(a) of the Bankruptcy Code allows a trustee to avoid transfers made up to two years prior to the commencement of the bankruptcy case if made with deliberate fraudulent intent. However, the rights of a good faith transferee are recognized and protected under Section 548(c). That section provides that a transferee “that takes for value and in good faith” may retain the property transferred to it “to the extent that such transferee . . . gave value to the debtor in exchange” for such transfer.
The briefs filed last week showed each side closely adhering to the paths provided by Judge Rakoff in his ruling last year. Rakoff strongly intimated that no value was provided with respect to the $83 million of fictitious profits received by the Wilpon/Katz Group in the two year period before the filing of the BLMIS case, and Picard accordingly contends now that no material facts or valid defenses exist with respect to those payments. On the other hand, Rakoff ruled that the Wilpon/Katz Group’s invested principal clearly did provide “value” to BLMIS, thus requiring Picard to demonstrate a lack of “good faith” in order to recover payments that constituted the return of such principal. The Wilpon/Katz Group argues strenuously that Picard’s mélange of supposed “red flags” fails to approach the standard of “willful blindness” that Judge Rakoff stated must be shown in order to show an absence of good faith.
Judge Rakoff must find with respect to each motion that there are no genuine factual issues to be determined at a full trial. Picard would appear to have the stronger chance for immediate success here. Unless Judge Rakoff determines to apply a different legal standard now than he did last year, the issue of fictitious profits looks to be clear and straight forward. On the other hand, the issue of good faith appears to be less susceptible to immediate disposition. While it does not appear that Picard will be able to satisfy Rakoff’s “willful blindness” standard, Judge Rakoff will probably allow Picard to present his evidence to a jury.
The adversary proceeding of Irving Picard, the trustee of Bernard L. Madoff Investment Securities LLC (“BLMIS”), against Fred Wilpon and Saul Katz, the owners of the New York Mets, and their families and affiliated enterprises (the “Wilpon/Katz Group”), could be substantially resolved over the next few weeks. Although the trial is scheduled to begin on March 19, each side intends to ask Judge Jed S. Rakoff at a hearing on February 23 to rule in its favor with respect to certain of the transfers made by BLMIS to the Wilpon/Katz Group during the two-year period prior to the commencement of the BLMIS liquidation case in December 2008. Picard asserts that there are no material disputed issues of fact with respect to at least $83 million that evidences the fictitious profits received by the Wilpon/Katz Group during that period, and the Wilpon/Katz Group makes the same contention regarding the remaining payments over that time that constituted the return of principal.
Between them, Picard and the Wilpon/Katz Group have covered virtually all of the payments that remain at issue following Judge Rakoff’s ruling last September that dismissed most of Picard’s claims. This “Jack Sprat” approach could resolve the entire case.
Both sides are following paths essentially laid out by Judge Rakoff in the September 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, which substantially reduced Picard’s potential recovery from nearly $1 billion to approximately $384 million. Judge Rakoff also set a very high standard for Picard to meet in order to recover any payments other than “fictitious profits”, stating that “the principal invested by . . . Madoff’s customers ‘gave value to the debtor,’ and therefore may not be recovered by the Trustee absent bad faith.” In Judge Rakoff’s view, Picard can only recover payments evidencing a return of principal by showing a lack of good faith tantamount to “willful blindness”. The Wilpon/Katz Group details the so-called “red flags” that Picard has set forth to show that the Wilpon/Katz Group should have suspected Madoff, and argues that in total they do not come close to clearing the hurdle established by Judge Rakoff.
Picard, on the other hand, has taken Judge Rakoff up on his virtually gold-plated invitation to seek summary judgment for the fictitious profits. “[G]iven the difficulty defendants will have in establishing that they took their net profits for value, the Trustee might well prevail on summary judgment seeking recovery of the profits[,]” the judge wrote in the September ruling. While Judge Rakoff has not yet ruled on the appropriate method for calculating the portion of the $384 million attributable to fictitious profits, Picard has consistently taken the position that the amount is approximately $83 million.
A ruling in favor of both motions would constitute a far larger victory for the Wilpon/Katz Group than for Picard. The Wilpon/Katz Group will have reduced its potential $1 billion exposure down to a level that will likely allow them to retain ownership of the Mets, and avoid the time, costs, and publicity of a lengthy trial. On the other hand, even with a victory regarding the $83 million, an appeal by Picard of the September ruling is highly likely.
Judge Jed S. Rakoff this week denied the request of Irving Picard, the trustee of Bernard L. Madoff Investment Securities LLC (“BLMIS”), to pursue an immediate appeal of Judge Rakoff’s recent decision to dismiss most of the counts set forth in Picard’s adversary proceeding against Fred Wilpon and Saul Katz, the owners of the New York Mets, and their families and affiliated enterprises (the “Wilpon/Katz Group”). He reaffirmed that the trial on Picard’s claims against the Wilpon/Katz Group will begin on March 19, 2012.
In his earlier ruling, Judge Rakoff held that the “safe harbor” provisions in Section 546(e) of the Bankruptcy Code limit Picard’s power to recover any transfer from a “stockbroker” that was a “settlement payment” made “in connection with a securities contract”. 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, and reduces the maximum amount that Picard could possibly recover from the Wilpon/Katz Group from nearly $1 billion to approximately $384 million.
In yesterday’s opinion, Judge Rakoff held that Picard had failed to show the necessary “extraordinary circumstances” which would warrant the “interlocutory” appeal and justify the indefinite delay of the pending trial. He directed Picard to wait until after the trial, when “an appellate court will be able to review, on a full record, not just [the] rulings of which the Trustee now complains, but all relevant rulings in this [complicated] proceeding[.]” Judge Rakoff disregarded Picard’s contention that the Second Circuit’s recent opinion, rejecting customer claims based upon Madoff’s fabricated BLMIS account statements, should prevent Ponzi scheme transfers from qualifying for “safe harbor” protection under Section 546(e), because no stocks or securities were actually ever sold. Judge Rakoff noted that the extent of the Wilpon/Katz Group defendants’ knowledge of Madoff’s activities, “one of the key issues in the forthcoming trial,” could be highly relevant to the question of whether transfers made as part of a Ponzi scheme should qualify for “safe harbor” treatment, and that “the factual record thus developed will be useful for assessing [those] issues now raised by the Trustee.”
Judge Rakoff’s earlier decision also set a very high standard for Picard to meet in order to recover any distributions to the Wilpon/Katz Group other than “fictitious profits”. As previously discussed on this site, while amounts paid out by BLMIS to investors such as the Wilpon/Katz Group as part of the Ponzi scheme can satisfy the requirement of actual fraud under Section 548(a) of the Bankruptcy Code, under Section 548(c) the Wilpon/Katz Group defendants can defeat Picard’s efforts to recover such distributions to the extent that they can show that they provided value, such as invested principal, in exchange for such distributions. Judge Rakoff has not yet ruled on the key question of how much of the $384 million in aggregate distributions during the two-year look back period should constitute “fictitious profits” and how much should be deemed to be the return of invested principal. He requested the parties to brief this issue following his earlier decision. Insofar as Judge Rakoff noted in the earlier decision that Picard “might very well prevail on summary judgment seeking recovery of the [fictitious] profits”, his ruling on the method for the calculation of such profits will likely be the determinative issue in this case.
The travails of Jefferson County, Alabama are well known. Ordered by a federal court to upgrade its sewer system in the late 1990’s, the project was marred by corruption, cost overruns and financing with complex derivatives that ultimately saddled the County with over $3 billion in debt. In addition, an occupational tax that provided the primary source of its unrestricted general fund revenues was invalidated, and the County faces both huge refund claims and operating revenue shortfalls. There is no dispute that Jefferson County is deeply insolvent, and there was little surprise when the County filed a petition under Chapter 9 of the Bankruptcy Code in early November in the Northern District of Alabama, commencing the largest municipal bankruptcy case in history.
For all of its problems, however, the County may not be eligible for Chapter 9 protection. The County’s bankruptcy petition has been challenged and a colorable issue exists as to whether the County can satisfy the strict requirements which must be met in order for a municipality to use Chapter 9 to seek adjust its debts. Among other things, those requirements, set forth in Section 109(c) of the Bankruptcy Code, state that a municipal entity seeking to be a debtor under Chapter 9 must demonstrate that it “is specifically authorized . . . by State law . . . to be a debtor under such chapter.” In Jefferson County’s case, the question is whether the nature of its debt obligations fall within the parameters of the Alabama authorization statute, Alabama Code Section 11-81-3. As strange as it sounds, Jefferson County’s staggering debt may not be the right kind of debt to enable it to utilize Chapter 9 of the Bankruptcy Code.
Jefferson County issued its debt in the form of warrants; it has no outstanding bond debt. The differences between warrants and bonds may be highly technical but they are evidently cognizable under Alabama law. The debt holders opposing the Chapter 9 petition contend that the first sentence of Alabama Code Section 11-81-3 only authorizes a Chapter 9 filing by the “governing body of any county, city or town . . . which shall authorize the issuance of refunding or funding bonds”, and that the distinction between bonds and warrants is sufficient to render Jefferson County ineligible for Chapter 9, since it cannot show that has been “specifically authorized” to use Chapter 9 under Alabama law. One bankruptcy judge in the Southern District of Alabama recently dismissed the Chapter 9 case of another Alabama municipality that had no outstanding bond debt. The federal district judge hearing the appeal of that dismissal has certified the question to the Alabama Supreme Court.
The County argues in response that the second sentence of Alabama Code Section 11-81-3, which contains express language that “authorizes each county, city or town . . . to proceed under the provisions of the acts for the readjustment of its debts”, is not limited by the reference to bond debt in the first sentence. It alternatively contends that even if the first sentence of Section 11-81-3 does provide such a limitation, the County’s previous issuances of bonds, even if not currently outstanding, satisfies the requirement.
Judge Thomas Bennett, the bankruptcy judge overseeing the Jefferson County case, has indicated that he may also certify the issue to the Alabama Supreme Court.
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.
Fred Wilpon, Saul Katz, and their families and affiliated enterprises (the “Wilpon/Katz Group”) last week formally requested the dismissal of the adversary proceeding commenced by Irving Picard, the trustee of Bernard L. Madoff Investment Securities LLC (“BLMIS”). In a two hour hearing before U.S. District Court Judge Jed Rakoff, the Wilpon/Katz Group argued that Picard has no basis to seek the return of approximately $1 billion received over the years by the Wilpon/Katz Group from BLMIS.
Picard’s complaint seeks to avoid all transfers made by BLMIS to the Wilpon/Katz Group as “fraudulent conveyances”, and to recover such amounts on behalf of the BLMIS estate. Both the U.S. Bankruptcy Code and New York State law permit a trustee to recover transfers made up to six years prior to the bankruptcy case by an insolvent debtor for less than “reasonably equivalent value” or which were made with fraudulent intent. However, a “good faith” transferee can retain such property or funds to the extent it gave value to the debtor in exchange for the challenged transfer, such as the satisfaction of antecedent debt.
The Wilpon/Katz Group argued that “reasonably equivalent value” existed for the $300 million of fictitious profits that the Wilpon/Katz Group received from BLMIS. Since the account statements issued by BLMIS prior to the discovery of Madoff’s fraud evidenced substantial account balances, the Wilpon/Katz Group contends that such payments constituted the satisfaction of antecedent debt as reflected by those statements. Unfortunately for the Wilpon/Katz Group, the U.S. Court of Appeals for the Second Circuit last week squarely rejected the ability of Madoff investors to rely on the fabricated account statements for the purpose of asserting claims against the BLMIS estate, and it is highly unlikely that Judge Rakoff would view the account statements any differently in this context.
The hearing’s primary focus centered on Picard’s highly aggressive efforts to claw back $700 million of payments that were constituted the return of invested principal. Insofar as invested principal typically constitutes “reasonably equivalent value” or value given in “good faith”, Picard’s efforts turn on whether his many allegations and inferences regarding the so-called “red flags” regarding Madoff’s fraud, which he contends were willfully ignored by the Wilpon/Katz Group, add up to a level of malfeasance or knowledge on the part of the Wilpon/Katz group sufficient to vitiate “good faith”. While Picard seems to have an uphill battle on this issue, a ruling that would allow him to proceed to trial would put immense pressure to settle on the Wilpon/Katz Group. Because Judge Rakoff went ahead and scheduled a March trial date, even though he has expressly reserved his decision on the motion to dismiss, some commentators have taken this as an indication that he is going to allow Picard the chance to prove his allegations that the Wilpon/Katz Group knew or should have known about Madoff’s fraud, thus putting the entire $1 billion at risk for the Wilpon/Katz Group.
However, a trial may be necessary even if Judge Rakoff rules in favor of the Wilpon/Katz Group with respect to the $700 million. One highly material issue remarkably has received very little attention so far even from the parties themselves; in the briefs filed ahead of the hearing it was addressed solely in footnotes. Of the $300 million in “fictitious profits” that Picard is looking to recover, nearly $133 million was transferred outside of the six year look-back period. Picard contends that the six year limitation under New York law should not apply because “the fraudulent scheme perpetrated by BLMIS was not reasonably discoverable by at least one unsecured creditor of BLMIS[,]”, an argument that seems discordant with his allegations about the plethora of “red flags” that the Wilpon/Katz Group supposedly ignored. A ruling by Judge Rakoff directing a trial solely on the amount of fictitious profits which may be recovered would in fact be a favorable outcome for the Wilpon/Katz Group.
Judge Rakoff probably will not rule until late September. At that time, the Wilpon/Katz Group may be looking at a trial with $1 billion at stake. Picard may just as easily be looking at a trial that would reduce his likely recovery to $167 million.
The well known travails of Fred Wilpon, the principal owner of the New York Mets, have all converged this past week. He, his partner Saul Katz and their families and affiliated enterprises (the “Wilpon/Katz Group”) lost several hundred million dollars when Bernard Madoff’s long running Ponzi scheme finally unraveled at the height of the financial crisis in 2008. The Mets’ on-field performance has been dismal, and their cash flow, weighed down by the debt incurred to build their under-attended new stadium, has been even worse. Finally, there have been the efforts by Irving Picard, the trustee overseeing the liquidation of Bernard L. Madoff Investment Securites (“BLMIS”), to recover from the Wilpon/Katz Group over $1 billion that it withdrew from BLMIS over many years. (Kelley Drye & Warren LLP represents other Madoff investors from whom recovery is being sought.) Wilpon further has had to suffer the ignominy of Picard’s public assertions that no good faith defense can apply which would permit an offset of $700 of principal invested during such period, because the Wilpon/Katz Group either knew or was willfully blind to the fraud that lay at the heart of BLMIS.
The past several days have seen, first, Picard file his opposition to the Wilpon/Katz Group’s motion to dismiss the recovery action, and then a magazine article in which Wilpon makes disparaging references to three of the Mets’ best players. Finally, yesterday came the announcement by the Wilpon/Katz Group of a prospective sale of a minority interest in the Mets to hedge fund investor David Einhorn.
The statements made by Wilpon about David Wright, Jose Reyes and Carlos Beltran have been fulsomely discussed by the sports media and are outside the purview of this blog. Bringing in Einhorn as a minority partner, while unquestionably easing the Wilpon/Katz Group’s immediate financial distress, likely will have long term ramifications that Wilpon may prefer not to consider right now. Suffice it to say that Einhorn, who famously denigrated Lehman Brothers before its demise, has never been particularly shy about speaking his opinions about under-performing enterprises.
Strangely enough, the best long term news for Wilpon appears to lie in Picard’s latest pleading. While Picard of course forcefully repeats his assertions that the Wilpon/Katz Group possessed sufficient information to have been on “inquiry notice”, and that the failure to conduct a “diligent inquiry” obviates any claim now of good faith, the legal brief breaks little new ground and mostly rehashes previous arguments made.
Picard particularly focuses on brief efforts by the Wilpon/Katz Group in 2001 to obtain fraud insurance for its BLMIS investments as evidence that it possessed sufficient information to undertake an investigation. However, as with his earlier allegations regarding the mischaracterization of a short term $54 million loan, Picard appears to place far more weight on certain isolated incidents than can reasonably be supported. By his own argument, the standard set forth in similar cases to place a hedge fund investor on inquiry notice requires, for example, credible evidence that a purportedly profitable fund was in fact losing money, or might be insolvent. The incidents to which Picard alludes come off as myriad loose strands that Picard fails to weave into a larger fabric.
Indeed, Picard’s intensive efforts to recover the $700 million in invested principal may well wind up impairing his chances of recovering a substantial portion of the “fictitious profits” that he is seeking. Of the $295 million in “fictitious profits” that Picard is looking to recover, nearly $133 million was transferred outside of the six year look-back period that is permitted under New York law. Picard has previously argued that the six year limitation should not apply because “the fraudulent scheme perpetrated by BLMIS was not reasonably discoverable by at least one unsecured creditor of BLMIS”. However, the more that he contends that there were a plethora of “red flags” that the Wilpon/Katz Group ignored, the more he undercuts his own argument to extend the six year look back period. There were, after all, numerous other Madoff victims equally as sophisticated as the Wilpon/Katz Group. Picard even notes that the Wilpon/Katz Group’s investigation into fraud insurance supposedly arose out of discussions had with another Madoff investor – a fact clearly discordant with any argument that the Madoff fraud “was not reasonably discoverable” by others.
Fred Wilpon has clearly had a highly eventful week. The effect of his intemperate words about his best players, and the long term ramifications of bringing on David Einhorn, can only be guessed at right now. But things do not appear to be measurably worse for him and his partners in the Madoff litigation as a result of Picard’s latest pleading.
Irving Picard, the trustee overseeing the liquidation of Bernard L. Madoff Investment Securites (“BLMIS”), has filed an amended complaint (the “Amended Complaint”) that seeks to buttress his allegations against Fred Wilpon and Saul Katz, the owners of the New York Mets, and their families and affiliated enterprises (the “Wilpon/Katz Group”). Among other things, the Amended Complaint details an alleged deliberate mischaracterization of a $54 million bridge loan from Madoff to one of the businesses controlled by the Wilpon/Katz Group, and cites the episode as further evidence of supposed wrongful behavior that demonstrates the complicity of the Wilpon/Katz Group in Madoff’s fraudulent activity.
The Wilpon/Katz Group, in the meantime, in its first legal counter-attack, has filed a motion to dismiss the Amended Complaint (the “Dismissal Motion”). Also, an article in today’s New York Times details the jousting taking place with respect to the massive trove of documentary information gathered by Picard prior to the commencement of the lawsuit.
The Amended Complaint and the Dismissal Motion reveal flaws and risks that each side faces.
The Amended Complaint seeks the repayment of over $1 billion. However, over $700 million constitutes the return to the Wilpon/Katz Group of invested principal, and Picard’s many allegations and inferences may simply not add up to the level of malfeasance or knowledge on the part of the Mets’ owners that he needs to demonstrate in order to recover those funds. Although a number of bad or grossly negligent actions are alleged, the Dismissal Motion refutes Picard’s factual allegations regarding many of the so-called “red flags” that Picard believes should have given the Wilpon/Katz Group reason to suspect Madoff. Some of Picard’s efforts to show mendacity, such as the $54 million transfer that helped the Wilpon/Katz Group to avoid a delay in closing an important deal and then was immediately repaid, come off on closer examination as somewhat thin gruel (or “bad stuff”, as one fictitious former Mets player might have put it).
In addition, of the remaining $295 million in “fictitious profits” that Picard is looking to recover, nearly $133 million was transferred outside of the six year look-back period. Picard contends that the six year limitation under New York law should not apply because “the fraudulent scheme perpetrated by BLMIS was not reasonably discoverable by at least one unsecured creditor of BLMIS[,]” an argument that seems to be discordant with his allegations regarding the plethora of “red flags” that the Wilpon/Katz Group ignored.
The Dismissal Motion, on the other hand, while strongly rebutting many of Picard’s allegations, shows the challenge that the Wilpon/Katz Group will have in fending off the demand for the return of $163 million in “fictitious profits” during the six year look-period. The bulk of the legal arguments in the Dismissal Motion raise nearly precisely the same issues that were recently argued before the Second Circuit Court of Appeals on Picard’s method for determining which customers hold claims against BLMIS. The Wilpon/Katz Group forcefully contends again that customers of BLMIS should hold claims based on the fictitious statements furnished to them by BLMIS, rather than being determined by the straight-forward mathematical calculation of invested principal less funds withdrawn. However, Judge Burton Lifland, the U.S. Bankruptcy Court judge overseeing the BLMIS case, has already rejected this argument, and the Second Circuit panel that heard the appeal earlier this month betrayed a fair degree of skepticism.
The incentives for both sides to work with former Governor Cuomo and reach a settlement remain strong.
Judge Burton Lifland, the bankruptcy judge overseeing the liquidation proceedings of Bernard L. Madoff Investment Securities LLC (“BLMIS”) made a shrewd decision last week in appointing, on his own initiative, former Governor Mario Cuomo to act as mediator in the lawsuit brought by Irving Picard, the BLMIS trustee, against Fred Wilpon and Saul Katz, the owners of the New York Mets, and their families and affiliated enterprises (the “Wilpon/Katz Group”).
Judge Lifland has a history of acting on his own to bring highly regarded individuals in to mediate seemingly intractable situations. Many years ago, for example, he asked former Secretary of State Cyrus Vance to step into the Macy’s chapter 11 case. Bringing in a neutral party of Cuomo’s stature at this early stage can only help tone down the rhetoric on both sides and perhaps get a derailed settlement process back on track.
A review of the 365 page complaint filed by Picard, unsealed last week after its contents were leaked to the news media, makes clear the enormous complexity of the case and the risks facing both sides.
Although enormous media attention has focused on Picard’s efforts to seek recovery of at least $300 million in “fictitious profits” and perhaps as much $1 billion for amounts withdrawn from BLMIS by the Wilpon/Katz Group, only $162 million represents fictitious profits over the six years prior to the bankruptcy case – the maximum “look back” period. Even if Picard is able to prove fully his allegations regarding the willful disregard by the Wilpon/Katz Group of the red flags concerning BLMIS, it would be an aggressive (and questionable) expansion of the fraudulent transfer provisions of the Bankruptcy Code and New York State law to recover any fictitious profits or other withdrawals going back more than six years.
For the Wilpon/Katz Group, on the other hand, the possible turnover of hundreds of millions withdrawn from BLMIS constitutes only part of its exposure. As Picard’s lawyers begin conducting discovery in earnest in anticipation of trial, the full costs will be staggering -- both in terms of legal fees, and the time and attention that will be required of so many individual members of the Wilpon/Katz Group to the detriment of other interests. In addition, the inner workings of the Wilpon/Katz Group’s businesses will be fully exposed. As embarrassing as the disclosures in Picard’s complaint doubtless have been to Wilpon and Katz, they are likely only a portion of what would be revealed during the course of full blown litigation.
Accordingly, both sides have strong incentives to settle, rather than have this case proceed to trial. Moreover, with a case docket that includes some of the largest and most complex bankruptcy cases in the country, such as Blockbuster, JudgeLifland in all likelihood was not relishing the prospect of a single trial tying up his courtroom for the better part of several weeks at a minimum. The appointment of former Gov. Cuomo serves everyone’s interests here.
Fred Wilpon, the owner of the New York Mets, was a close friend of Bernie Madoff, and it has been generally believed since the outset of the scandal that Wilpon, his family and affiliated enterprises lost hundreds of millions in the great Ponzi scheme. It has also been known that the Wilpon group was a so-called “net winner”, as it had collectively withdrawn more over the years from Bernard L. Madoff Investment Securities LLC (“BLMIS”) than it had invested, and it has been expected that Irving Picard, the BLMIS trustee, would seek to recover the difference – an amount believed to be in the tens of millions -- on behalf of the BLMIS bankruptcy estate as a “fraudulent conveyance”. (Kelley Drye & Warren LLP represents other Madoff investors from whom recovery is being sought.) However, as has been widely reported over the past several days, the Wilpon group could be at risk for much more. While the details remain unclear because of the “sealing” of the trustee’s lawsuit, it appears that Picard is seeking to recover hundreds of millions withdrawn from BLMIS by the Wilpon group, rather than simply the difference between such withdrawn amounts and the invested principal.
Courts going back centuries have permitted the avoidance of transfers made by a debtor with the intent to “delay, hinder or defraud” creditors. Section 548(a) of the Bankruptcy Code allows a trustee to avoid transfers made up to two years prior to the commencement of the bankruptcy case, if made either with deliberate fraudulent intent, or made while the debtor was insolvent and for which the debtor received less than “reasonably equivalent value” in return. Picard can also recover transfers made up to six years prior to the bankruptcy under New York State law.
However, the rights of a good faith transferee are recognized and protected under Section 548(c). That section provides that a transferee “that takes for value and in good faith” may retain the property transferred to it “to the extent that such transferee . . . gave value to the debtor in exchange” for such transfer. “Value” is defined under the Bankruptcy Code to include the “satisfaction or securing of a present or antecedent debt[.]”
Amounts paid out by BLMIS to investors over the many years of the Ponzi scheme satisfy the requirement of actual fraud under Section 548(a) of the Bankruptcy Code. Under Section 548(c), investors can defeat a trustee’s efforts to recovery such distributions to the extent that they can show that they provided value in exchange for such distributions, and capital deposited in an investment fund constitutes antecedent debt. The key issue for the Wilpon group is whether or not it invested money in BLMIS “in good faith”. Since there is virtually no chance that Fred Wilpon had any actual knowledge of Madoff’s scheme, the question will turn on whether, under the totality of the circumstances, Wilpon and the Wilpon group somehow “should have known” about Madoff’s fraudulent activity.
Were there sufficient “red flags” that ought to have alerted a sophisticated investor such as the Wilpon group? In view of the close relationship between Madoff and Fred Wilpon, Picard clearly believes that the Wilpon group will be unable to satisfy the “good faith” element of Section 548(c), and thus will have no defense to the recovery of all moneys withdrawn during the six year look back period.
The ongoing debate about the treatment of cleanup orders in bankruptcy looks to be getting a lot more interesting in the Second Circuit.
In a decision (.pdf) that could signal important precedent in the making, the United States District Court for the Southern District of New York granted the government’s motion to withdraw the reference (.pdf) of an adversary proceeding filed by debtor Chemtura Corporation in the context of its chapter 11 cases.
Chemtura’s amended complaint (.pdf) against the EPA and numerous state environmental agencies (originally filed (.pdf) in November 2009) seeks a declaratory judgment that the Debtors’ environmental obligations relating to sites that
(i) the Debtors no longer owned or operated as of their March 18, 2009 petition date or
(ii) are and always have been owned by third parties unaffiliated with the Debtors, are dischargeable “claims” within the meaning of section 101(5) of the Bankruptcy Code.
Opposing the government’s effort to resolve the matters in District Court, Chemtura had asserted that its complaint involved “settled” provisions of CERCLA that could be addressed by the Bankruptcy Court. Similarly, in support of the Debtors’ opposition to withdraw the reference, the Creditors’ Committee had argued that the adversary proceeding simply required application of the Second Circuit’s decision in In re Chateaugay Corp., 944 F.2d 997 (2d Cir. 1991). District Judge Richard Berman disagreed, and held that withdrawal of the reference was mandatory because analysis of the issues raised in the Chemtura adversary proceeding requires “considerably more” than routine application of CERCLA (potentially RCRA as well) and bankruptcy law. More importantly, the Court stated that it faced “an issue of first impression” in the Second Circuit that is not answered by Chateaugay, agreeing with an argument made by the government (.pdf) in support if its withdrawal motion.
In Chemtura, the Debtors are seeking a ruling that would render Chateaugay’s holding – that an injunctive order obtained under CERCLA that to any extent ends or ameliorates continued pollution is not a dischargeable “claim” – inapplicable to property that is neither owned nor operated by the Debtors. As we recently wrote, when a debtor-PRP (“potentially responsible party”) is saddled with joint-and-several responsibility to remediate sites that the debtor no longer even owns or operates, reorganization efforts can be substantially (or completely) impeded and the recoveries of non-environmental creditors significantly diluted. If the Chemtura matter does not settle and the Southern District (and perhaps ultimately the Second Circuit) proceeds to rule on the dischargeability question on the merits, the stage is set for a precedential decision - one that would implicate far more than just the Chemtura estates, and could serve as an important venue consideration for any company with significant environmental liabilities facing the possibility of a chapter 11 filing.