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This Tuesday, Judge Jed S. Rakoff dismissed nine of the eleven claims filed against cash-strapped Mets owners Saul Katz and Fred Wilbon. The claims were filed by Irving H. Picard, the appointed bankruptcy trustee over the Madoff estate, who is now attempting to claw back as much of the assets as possible from various investors in the failed Ponzi scheme to satisfy Madoff’s creditors/victims. However, Mr. Picard now has a much higher hurdle to get recovery for Madoff’s creditors, as the court limited his claims against the Mets owners to those where they were ‘willfully blind‘ to Madoff’s actions.
The decision was based upon a reading of section 546(e) of the bankruptcy code, the so-called safe harbor provision. Basically, of the eleven claims, only the first was really based upon federal bankruptcy law and the rest were based upon New York state law. When an estate goes into bankruptcy, under section 544(b), all state law is given full faith and credit except under 546(e) for those transactions involving securities and stock deals. As this is a Ponzi scheme involving Madoff’s company, a registered stock broker, Judge Radoff ruled that the passage applies. This is extremely important, as it eliminates all the state claims against the Mets’ owners, and New York claw-back provisions are allowed to go back six years instead of the federal two. This, obviously, greatly reduces Katz’s and Wilbon’s liability. Furthermore, the safe harbor provision applies only to transactions that are not ‘fradulent’ under section 548(a)(1)(A)–essentially just the first claim of the complaint. The problem with that is Mr. Picard will have to prove that the Mets owners were willfully blind to Madoff’s action, something which is not going to be easy to prove. Ultimately, for better of for worse, the decision is going to limit the ability of Madoff’s victims to recover from the scheme’s investors, who actually managed to get their money out before it collapsed.
While Mr. Picard is already planning an appeal, the decision is going to have interesting implications for the Mets organization as a whole. As mentioned previously, the entire financial picture for the Mets isn’t rosy to begin with. A deal to sell a minority stake in the team has already collapsed, though that always remains an option. They are still on the hook for a possible nine figure court decision. Commissioner Bud Selig, if he gets fed up, might choose to seize control of the team as he did with the Dodgers under the “best interests of the game” clause. And of course, at the end of the day, the Mets still have the misfortune of being, well, the Mets.
To read the full text of the order by Judge Rakoff, please click here.
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