By Steve Kallas
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Any way you look at it, the 18-page decision filed yesterday by United States District Judge Jed Rakoff (a very well-respected and intelligent judge) in the Mets/Madoff case has to be viewed as a win, even a vindication of sorts, for Mets owners Fred Wilpon and Saul Katz, as well as the other defendants involved in Sterling Equities (referred to as “Sterling” in this article).
The decision dismisses nine of the 11 Counts in the mammoth complaint filed by Madoff Trustee Irving Picard against the Sterling defendants. And, while, at least arguably, there is still a lot left to the lawsuit, the reality is that, finally, there might be some room here to have real settlement negotiations, especially with former Governor Mario Cuomo still assigned to mediate the dispute.
Judge Rakoff let stand only two of the 11 Counts in the Complaint, but in one of them, Count 1, he narrowed the already questionable (in this writer’s opinion) ability of the Trustee to get at the $700 million in principal invested by the Sterling defendants with Madoff over the years. Specifically, Judge Rakoff ruled that the Trustee can recover the Sterling defendants (including Wilpon and Katz) return of principal “only by showing an absence of good faith on defendants’ part based on their willful blindness.”
Judge Rakoff specifically rejected the Trustee’s “inquiry notice” claim (that is, that the Sterling defendants had a duty to, in essence, do their own Madoff investigation based upon certain factors, which, according to the Trustee, should have made them aware of what was going on).
The bottom line on this claim is that Judge Rakoff has made an already difficult theory to prove even more difficult by eliminating the “inquiry notice” aspect of the Trustee’s claim and focusing solely on the “subjective” willful blindness test (that is, that the Sterling defendants turned a blind eye to certain factors in the Madoff situation that they simply did not want to know about), something that the judge seems to believe will be very difficult, if not impossible, to prove in court.
While this part of the holding relates to principal (as opposed to the so-called “fictitious profits” of about $300 million in the Complaint), any reading of it would have to conclude that this is a win for the Met ownership.
BUT WHAT ABOUT THE $300 MILLION IN PROFIT?
Well, that’s an interesting question. In footnote 6 at page 11 of the decision, Judge Rakoff states that, in his opinion, it looks like the Trustee will be able to recover somewhere between $83 million and $295 million in net profits (again, that’s profits as opposed to principal). When a judge writes that “the Trustee might well prevail on summary judgment seeking recovery of the profits,” he is essentially saying that, in his view (the only one that counts at this time), the Trustee has a good chance to get a big recovery from the Sterling defendants, with the open question, specifically not decided here, being how far back from the date of the bankruptcy the Trustee can go to recover profits.
Or maybe the judge did decide the time period. At page 15 of the decision, Judge Rakoff states that, in Count 1, “the Trustee can recover defendants’ net profit over the TWO YEARS prior to the bankruptcy” (emphasis supplied). Maybe this possible discrepancy will be cleared up today when the parties reconvene before Judge Rakoff (maybe he meant at least two years, subject to the footnote discussed above). If it is only two years (i.e., $83 million), then there would be even better parameters for settlement discussions.
WHAT DOES THE TRUSTEE THINK AND WHAT WILL HE DO?
Although initially (and not surprisingly), the Trustee had no comment, you can bet that he will use all of his options forward-looking. That would include, in this writer’s opinion, a motion before Judge Rakoff to reconsider his decision, that is, that Judge Rakoff made a mistake in his ruling. But a motion for reconsideration is rarely successful.
At some point, this decision will be appealed to the Second Circuit Court of Appeals (the hierarchy is bankruptcy court, up to federal district court (Judge Rakoff) and then up to the Second Circuit Court of Appeals (almost always a three-judge panel). Indeed, Judge Rakoff, in the only other surviving Count (Count 11), has decided that the Trustee can only subordinate other Sterling defendant claims (put those claims behind other claims of defrauded investors) if he can prove the difficult “willful blindness” standard discussed above. These claims are reportedly for somewhere in the neighborhood of $160 million, making the Sterling position in any settlement discussion stronger (it remains to be seen whether Judge Rakoff’s decision on Count 11 is contra to the Second Circuit’s previous decision which upheld the Trustee’s definition of net equity).
IT AIN’T OVER TIL IT’S OVER
Do the Met owners now have the ability to keep their team given this decision? While this case is far from over, it would seem that settlement negotiations from the Trustee’s side will start much lower than $800 million or $900 million or $1 billion. On the Sterling defendants’ side, it would seem that they would be willing to pay some real number ($50 million, $100 million, $150 million?) to end this case, something that they should be able to afford.
For the first time, there appears to be some room for real settlement negotiations.
If, however, the Trustee determines that this decision will have a negative effect on some of his other big cases (and it says here that it will), he may feel obligated to fight this to the hilt. That would mean that, absent a settlement, this case could be a long, drawn out affair with a Second Circuit appeal as well.
Pursuant to Court Order, the parties will meet with Judge Rakoff, Wednesday, September 28, at 3 p.m.