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.