News lately has featured some
stories, which the average reader may have missed, about a legal procedure
which is becoming more common during this economic firestorm – the
‘Clawback.’ It sounds like another Freddy
Krueger horror flick, but it’s actually quite an interesting development
for us to consider here.
While we are busy preparing for and
enjoying this year-end holiday season, the Trustee of Bernie Madoff’s Estate,
Irving Picard, has been quite busy. Picard faces a filing deadline in the Madoff Bankruptcy
Case after which he cannot file any more ‘Clawback’ actions, so here they come.
First, Picard has been suing
‘victims,’ of Madoff’s Ponzi Scheme – that is, the ones who did not lose money,
but, instead, who received those payments, year in and year out, at annual
performance rates that simply did not make sense – the ‘lucky winners,’ if you
will. But, who complains when checks
arrive?!? The double-whammy, of course,
is that those same ‘victims,’ (one must be careful in using that word) also
paid income taxes on the monies represented by those checks, income taxes for
which some are now seeking refunds since Madoff really didn’t make any
investments amid all of his elaborate con game.
One financial pundit has called it the "Bernard Madoff recovery
sweepstakes."
It has been
reported that Madoff’s buddy, Carl Shapiro, a major
player in the apparel world (or, as some call it, the ‘schmata business’) agreed to return some $625 million to be
restored to the Madoff Bankruptcy Estate and ultimately to be shared by Trustee
Picard among ‘victims’ of Madoff’s massive swindle. Another is rumored to be the owner of the NY
Mets MLB franchise.
Next, Madoff’s Trustee, Pickard,
went after banking giant UBS, and now he is suing JPMorgan Chase. The case against Chase, filed in Manhattan’s
very busy US Bankruptcy Court, seeks recovery of nearly $1 Billion, denominated
as ‘fees and profits,’ plus another $5.4 Billion in just plain ‘damages.’ JP Morgan Chase had the dubious distinction
of being the primary banker for Madoff’s company which made the bogus
investments (or, more properly, didn’t invest at all).
A law firm website lists many
targets for Madoff Clawback litigation. May your and your business’ name not be on
the list! The reach of the Clawback even
includes charitable contributions and donations to charities and foundations.
Madoff’s Estate is not the only one
partaking of the ‘Clawback’ this holiday season. You may remember the Heller Ehrman law firm,
once, and for decades past, a quite prominent player in San Francisco legal
circles. Recently, the now defunct
Heller firm’s Bankruptcy Trustee brought suit against some 48 separate law
firms, alleging that each stole business from Heller Ehrman while buzzards flew
circles over it’s corpse and its former partners scattered to the four
winds. The list of Defendant law firms
reads like a ‘Who’s Who’ of large US law firms.
The double-whammy here is that newly made partners of the Heller firm,
just before it’s demise a few years ago, were given the seemingly splendid
opportunity to live future lives of wealth beyond avarice . . . just sign right here on this guarantee for
the new, magnificent office lease and these other firm obligations! Now, those formerly new partners are on the
hook, arguably, for Heller’s Creditors’ claims, having received very little, if
any, of the promised cornucopia of riches that should have arrived on account of
their partnerships.
The legally trained will spot that
the Heller situation described above is slightly different from the Madoff
one. In the Heller Chapter 11
Banktruptcy, the Trustee is arguing that other firms, which enjoyed collecting
on bills arguably due to the defunct Heller firm after Heller’s former partners
joined them and continued working on the matters under the masthead of their
new firms, were engaging in ‘fraudulent transfers’ and that, under the
precedent of a 1984 California Appellate Court Opinion in a case called Jewell v Boxer, those monies must now be
paid back to their alleged rightful owner, the Heller Bankruptcy Estate. But, it is similar enough to get the point of
this article.
In protracted periods of economic
turmoil, amid the carcasses of so many companies that have failed, creditor
litigants look to see who is still standing, and then proceed to go after them
in an effort to be made whole from somebody with ‘deep pockets.’ Aside from making a whole lot of new legal
work for those in my profession when we could all use a few extra bucks, this
is truly a grim reminder that arguably ill-gotten gains, particularly from
entities which have gone under in this economic firestorm, may have to be
returned in the future to those who contend they are properly entitled to them,
often the now dead entity’s Bankruptcy Trustee or other creditors of the
entity. This will be a rude surprise for
many this holiday season and it promises to be the gift that keeps on giving,
all through next year and beyond.