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 It has also been known that the Wilpon group was a so-called “net winner”, as it had collectively withdrawn more over the years from Bernard L. Madoff Investment Securities LLC (“BLMIS”) than it had invested, and it has been expected that Irving Picard, the BLMIS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because of the “sealing” of the trustee’s lawsuit, it appears that Picard is seeking to recover hundreds of millions withdrawn from BLMIS by the Wilpon group, rather than simply the difference between such withdrawn amounts and the invested principal.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.