In-depth: Wilpons may have to pay $300M+

Judge Jed S. Rakoff’s barb in court late Friday afternoon -- when he thanked the lawyers involved in the suit against Fred Wilpon for giving him tons of paperwork because “otherwise I would have had to watch a Mets game, which would have been a very painful process” -- quickly filtered back to the team’s clubhouse at Citi Field. In fact, at least two people in uniform expressed somewhere between disbelief and disgust, not taking too kindly to the quip at their expense.

Still, the future of Wilpon, brother-in-law Saul Katz and family as Mets owners rests with that federal judge right now. Although a jury ultimately could decide how much the family owes, Rakoff will determine whether the case will ever go to trial.

AShirley Shepard/AFP

Courtroom sketch of Judge Jed S. Rakoff from recent case.

Rakoff announced that he will rule by late September whether to toss all, or part, of the $1 billion lawsuit against the Wilpons.

Here’s a primer on where things stand:

1. The consensus among experts is that a Second Circuit appeals court ruling last Tuesday was a blow to the Wilpons.

The court, to which any Rakoff decision could be appealed, ruled that the proper way to determine who was a loser in the Bernard Madoff Ponzi scheme is very straightforward: If you invested more money than you withdrew, you are a loser by that amount and can apply to trustee Irving Picard to try to recover that sum.

The Wilpons and others wanted the standard to be what Madoff’s last statement indicated they had in their accounts -- in the Wilpons’ case, apparently $500 million. Of course, those statements were fiction, so the court decided “the net equity principle” -- money in minus money out -- was the proper standard.

Still, the Wilpons’ attorneys assert that the appeals court decision applies only to losers, interpreting the ruling narrowly. Those who made money in the Ponzi scheme were not affected by that ruling, they maintain.

Most experts interviewed by ESPNNewYork.com suggest that the Wilpons’ position is a stretch, even if Rakoff might be predisposed to siding with the Wilpons.

“That’s a huge stretch,” said attorney John V. Donnelly of Cozen O’Connor in Philadelphia. “That Second Circuit decision was very bad for them. It reaffirms what I would say many in the area believe, which is the prior case law supports [Picard’s] position that those false profits are going to come back. The trustee is very strong on that issue. … If the judge comes out against Picard on this, you can definitely expect Picard to take it up to the Second Circuit on that issue.”

Jeff Morris, a University of Dayton bankruptcy law expert who has testified before congressional committees on behalf of the National Bankruptcy Conference, was more generous to the Wilpons in his analysis, though.

“Courts decide only the exact issue presented to them,” Morris said. “They addressed this particular aspect of it [losers’ rights], but some other aspect of it has not been resolved. Now I think the reason people are sort of intuiting that the relative circumstance -- a winner circumstance -- ought to be done the same way [money withdrawn minus money invested] is because the underlying reasoning of the Second Circuit was there were no trades. So why would you use a statement that says here are a bunch of trades as some basis for establishing what your claims are?”

Morris added: “I read the transcript of the hearing on Friday, and I think the judge is saying, ‘Let’s make sure the Second Circuit did say, or its decision does mean, that it applies to winners and not just losers.’ He doesn’t appear to be convinced of that.

“It could mean the judge is leaning a certain way. It could mean the judge is looking for a nice way to support what he’s thinking, which might be the opposite of what the question would suggest. So there’s no way to know that until a judge writes his decision.

“You can take a lot of things from these transcripts and often be wrong. You just don’t know until a judge makes his or her decision. I hate to waffle on it, but that’s kind of the way these things work sometimes. It could be that the judge is trying to sort of say, ‘Hey, look, I don’t particularly like what the Court of Appeals did, so I think that it ought to be limited.’ This is true of all decisions. If [the lower-court judge] thinks it’s not the best decision [by the appeals court] beyond the particular specific issue presented, you read it in such a way that says, ‘Well, it certainly nails down this aspect, but other aspects are still open for discussion.’”

Morris, in what appears to be a minority expert opinion, went on to suggest that it’s “not inescapable” for the Wilpons to wiggle free.

If Picard were to lose in front of Rakoff, then appeal to the Second Circuit, Morris said: “The Second Circuit could, when presented much more specifically with that circumstance, say, ‘Well, you know, the rule we adopted was a rule that sort of said, ‘If you got a [loss] claim, this is a good way to tally up the number. And Judge Rakoff has a certain way [with respect to winners] and we think that’s right.’ That can still happen. … Secondly, the Second Circuit isn’t the end of the day. They have bosses in Washington. And the Supreme Court, I don’t know what they would do. They’re very hard to read in bankruptcy.”

Still, Morris wondered what other standard could apply beyond money in versus money out.

“I don’t see how it’s plausible to be what was on the statements because the underlying fact is that those are entirely fictional,” Morris said. “I suppose one could argue, ‘Let’s take what an S&P number would be.’

“Now the problem, of course, is all of the trades were fictional. … It doesn’t make sense to me to say, ‘Let’s suppose they had traded 22,000 shares.’ It doesn’t make sense because if that had actually happened, there would have been other impacts on the market that presumably would have affected what these returns would have been. It doesn’t make sense to me to let people get anything out of something that doesn’t exist.

“But I suppose I could imagine someone saying, ‘Well, gee, if we had been in the market… So what did the market generally do? Take the S&P or some other index and say how much that spit out.’ And just to pick a number, if that was 7 percent and you were getting 14 percent, then half your profits go back.”

Still, most experts believe the Wilpons should be on the hook for a minimum of $300 million, assuming Picard’s team can substantiate that as the amount the Wilpons withdrew from certain funds over the amount they invested during the allowable clawback time period.

2. The Wilpons do not concede the $300 million figure is correct.

Even if the net equity principle does apply to winners (money withdrawn minus money invested is the profit to be returned), that does not mean the Wilpons are prepared to fork over $300 million.

Their backup assertion would be that their funds made only $160 million, not $300 million -- because the funds that made money are offset by other funds they own that lost money.

The issue, according to experts? The funds had different owners -- different Wilpon family members, different businesses such as the Mets and Sterling, charities, etc. That appears to allow Picard to pick only those funds that made money, making it seem as if he’s a shoo-in for $300 million rather than $160 million, assuming Rakoff accepts the “net equity principle.”

“I hate to put a percentage on it, but it strikes me that’s a hard sell,” Morris said about the Wilpons arguing to pool all of their funds to come up with the $160 million figure. “There are X number of individuals. And then there are X number of other entities that are not natural persons but they are legal entities. … Corporations are persons for lots of reasons. But it seems to me that if you choose to operate in different forms, that’s your choice. You don’t get to then ignore it later on when it comes to your benefit and say, ‘Well, let’s lop them all together.’

“That’s not to say it doesn’t happen. There are many times when circumstances arise where we do consolidate all of these things together. And bankruptcy is no exception to that. … Sometimes it’s because the books are so messed up we can’t tell one from the other. Sometimes it’s because everything you’ve ever dealt with was together, and everyone acted in such a way that was a single entity or enterprise.

“But the starting point on all of those things to me is, ‘You’ve got a different name on that thing? Well, you chose to put a different name on it.’

“For example, you walk by a [Sterling] construction site and a rivet falls down and whacks you on the head. You don’t sue the Mets. And if you sued the Mets, they’d say, ‘We’re a separate legal entity. How could you possibly sue us?’ People try to do that sometimes because the construction company, in my hypothetical, is insolvent but the other enterprise owned by the same shareholder is solvent. So they say, ‘I’ve got a deeper pocket over there. Let me bring them in.’ You just can’t do that.”

3. The Wilpons may actually be in good shape in not owing the other $700 million.

In addition to the $300 million in what he labels “fictitious profits,” Picard wants the Wilpons to forfeit $700 million in principal. He alleges they looked the other way amid warning signs of fraud by Madoff and should be penalized by forfeiting their principal investment, as well.

That’s the part that could get thrown out by Rakoff in his ruling next month. At least, it has a better chance of getting thrown out than the $300 million part.

“It’s certainly possible that he throws it out,” Donnelly said with respect to the $700 million. “Those are aggressive positions in trying to reclaim principal based on this type of argument.”

Still, Donnelly added: “But they are possible claims. They’re plausible claims brought in good faith.”

Donnelly said for Rakoff to throw out all or part of the suit, he would have to accept what Picard’s team is claiming is entirely true and decide there is no way, even with that being the case, that a reasonable jury could side in Picard’s favor. (Not would, just that it might.)

“If I’m going to handicap it, I say there’s a very strong chance Picard wins [on proceeding with the case] on the fictitious profits and the $300 million definitely moves forward,” Donnelly said. “It’s going to be a closer [decision] on the $700 million, but it’s certainly possible some or all of those claims make it to a jury.

“The position here is a little bit different from what you get in a classic case. Usually, you file a complaint, and the motion to dismiss comes immediately thereafter.

“And then summary judgment is a little different because that usually comes at the end of discovery, when you’ve taken the depositions, reviewed the documents. Here, Picard at least has had some discovery. He’s deposed some people. He’s gotten a bunch of documents. And so if you’re going to use the summary judgment standard, you look at the evidence. And Picard has to come forward and say, ‘Here’s the evidence that supports my position and is sufficient to state a claim. So if the jury believes my evidence is true, then I win.’ And if you can do that for each element of your claim, then you avoid summary judgment and get to the jury.

“And what the Wilpons will argue is even if you accept Picard’s evidence as true, he just doesn’t have enough.”

The standard the judge articulated for the $700 million “should have known” part was: “You purposely turn away from learning something because you knew there was a high probability that you would learn something bad.”

That’s a pretty high bar, and it's one the sides will argue over.

“The standard one applies to that -- from turning a blind eye to actual intent to inquiry notice -- is where this fight is,” Morris said. “Let’s say we’ve got these three standards -- actual intentional actions, and then turning a blind eye, and then inquiry notice. The trustee sounds like his argument is to try to conflate the last two and say they’re kind of the same. And the other side is saying, ‘Heck, no.’ They want blind eye sliding toward actual intent. The trustee wants to slide it down toward inquiry notice. And I would say the law isn’t abundantly clear in any of that, and this is the kind of case that will help set some of the parameters for that.”

Said Donnelly: “You’ll hear it reiterated a number of different ways. It’s kind of the ‘ostrich principle,’ that you just stick your head in the sand. You really suspect that there’s something bad going on, and you become willfully ignorant of it -- ‘Don’t tell me. I don’t want to know. Because I have a feeling if you tell me, then it’s going to be bad, and I’m going to have to do something else.’”

The perception was the Wilpons were in luck in evading the $700 million once Rakoff grabbed the case out of bankruptcy court and moved it to federal district court in Lower Manhattan.

“The law is going to be the same,” Donnelly said. “I think the Wilpons’ theory was probably that they had a better shot at getting a district court judge to subscribe to their theories than their bankruptcy judge did based on some of the prior rulings of the bankruptcy court. Judges are individuals. To use sports parlance, they’re different ballplayers. The rules are the same. They’ll play within the rules. But people have different styles and different interpretations and different issues. That’s why you have courts of appeals, etc.

“This judge, Judge Rakoff, is an experienced judge. He’s a smart judge. He will apply it and call it as he sees it. So they’re not going to get any favoritism or anything like that. But I think their view is, ‘Hey, a different umpire might have been better for us.’”

Morris concurred: “The law is not supposed to be different. And it is not different, in fact, I don’t believe. I’ll put it this way: There is a perception that, in a bankruptcy court, there is a higher likelihood of a more favorable decision toward the bankruptcy collection process, if you will. And in the non-bankruptcy courts, there is a less likely result in favor of the bankruptcy collection process. In part, it’s a function that bankruptcy judges every day do this sort of scenario. And it is less jarring for them to see it than it is for somebody who sees every kind of case that comes to the district courts. They say, ‘Wait a minute. These people maybe didn’t do too much wrong here, and you’re trying to get back a bunch of money.’”

4. The probability is the case will not go to trial.

Rakoff set a March 5 trial date, but experts predict the likelihood is the case never gets there -- and not because Rakoff is poised to toss the entire suit.

Former New York governor Mario Cuomo, who was in the courtroom Friday, is mediating the dispute.

If Rakoff tosses the $700 million part and leaves only the $300 million claim, it makes sense for the sides to avoid a costly trial and settle for somewhere between the $160 million and $300 million figures -- probably closer to the latter sum.

If Rakoff leaves the entire $1 billion suit intact for a jury to decide, it might be advantageous for the Wilpons to settle for just north of $300 million, if Picard’s side is willing, to avoid what could be a catastrophic defeat in court.

Then again, in either scenario, if the Wilpons are not capable of scrounging up the money, maybe they just roll the dice in court and see what happens. And if the entire suit stays intact, maybe Picard goes for the jugular, figuring the $300 million is his no matter what.

“Let’s say the judge keeps everything in play, so that you’re going to go to trial on the $1 billion,” Donnelly said. “I would say that’s a pretty strong incentive for the Wilpons to settle somewhere between the $300 million and the $1 billion. If he throws out the $700 million and you’re left with the $300 million, I think there’s still a good chance that it would settle, but it would affect the number.”

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