Kallas Remarks by Steve Kallas   –   The issues before the United States Second Circuit Court of Appeals in the Madoff/Mets (and others) case were discussed at length in this column back in March (Kallas Remarks, 3/7/11). Without rehashing it all, the Sterling defendants (Fred Wilpon, etc.) and others argued vehemently that they should not have to return the money they received from Madoff as “net winners’ (that is, they took out more than they put in with Bernie Madoff before the Ponzi scheme was discovered).

With fantastic lawyers (Davis, Polk and Wardwell for the Wilpon and Katz families), some thought the “net winners” definition would be rejected by the appellate court, after Trustee Irving Picard and Bankruptcy Judge Burton Lifland allowed such a definition (putting the Met owners on the hook for, arguably, $300 million – more on that number later).

But, as was stated here back on March 7, when Chief Judge Dennis Jacobs said, during the oral argument on the appeal, that defendants like the Wilpon family should not have expected that the net equity of their Madoff accounts would be based “on whatever amount Madoff made up while chewing on his pencil and staring at the ceiling,” you knew the appeal was in deep trouble.

And today we found out how much trouble, as the Second Circuit rejected any argument for a different definition of net equity, leaving intact the definition set forth by Picard and affirmed by Bankruptcy Judge Lifland.

Back in March, nobody could have taken away a positive note from Judge Jacobs’ comment if you were looking for a reversal. And, as luck would have it, it was Chief Judge Jacobs who wrote the opinion for the unanimous (3-0) appellate panel. Indeed, in his 35-page opinion, Judge Jacobs essentially repeated what he had said at the oral argument back in March, by writing “[i]ndeed, if the Trustee had done otherwise, the whim of the defrauder would have controlled the process that is supposed to unwind the fraud.”

And therein lies the problem for the “net winners.”


Well, it would seem that the next argument for those in the Wilpon situation would be to try and limit the reachback of the trustee to those net profits. Generally speaking, the look-back time in a bankruptcy is six years from the date of the bankruptcy. A review of this from awhile back indicated that the Wilpon/Katz group would be on the hook for $163 million, not $300 million, if the six-year rule is applied.

It says here that this issue will also be litigated if no settlement (yes, Mario Cuomo is still trying to mediate this case) is reached.


There is a hearing before well-respected federal judge Jed Rakoff later this week in Manhattan to determine, among other things, whether the trustee can try and get back an additional $700 million from the Wilpon/Katz defendants (and billions from others as well). This has always seemed to be a legal reach to this writer and, frankly, the notion that the Wilpon?Katz defendants knew about the fraud was always ridiculous. As for the “should have known” about the fraud standard that the trustee has tried to pin on the Wilpon/Katz defendants and others, that, too, seems to be a huge stretch of the facts and the law.

It says here that Judge Rakoff will give the Mets and their owners some good financial news on that front in the not too distant future.

Stay tuned.

© Copyright 2011 by Steve Kallas.  All rights reserved.

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