Here’s a cautionary tale from the liquidation of the Bernard Madoff Ponzi scheme: For having lost a discovery motion, Bankruptcy Judge Stuart M. Bernstein of Manhattan directed the lawyer to pay the trustee $57,347 under Rule 37(a)(5)(B) in reimbursement of the trustee’s attorneys’ fees and expense incurred in defeating the motion.
Representing defendants in a fraudulent transfer suit, the lawyer was on the losing side of a protracted motion seeking to compel the Madoff trustee to review 30 million documents and the contents of 13,000 boxes.
Although Rule 37(a)(5)(B) provides that the sanction may be imposed against both the lawyer and the client, Judge Bernstein decided in his March 20 opinion to absolve the clients of liability because the “unjustifiable position” was attributable to the lawyer. According to the judge, the lawyer “perpetuated the myth” that Madoff had actually purchased securities with monies invested by customers.
Discovery in the SIPA Liquidation
In the Madoff liquidation under the Securities Investor Protection Act, the Second Circuit has held that customers who took out more cash than they invested were the recipients of fraudulent transfers with “actual intent,” even if they did not know there was fraud afoot. Customers in that category are known as “net winners.”
The payments to net winners were fraudulent transfers because the money Madoff used was stolen from other customers and did not represent a return of the customers’ own investments. The Madoff trustee is now engaged in suing net winners who have not settled.
Judge Bernstein’s 43-page opinion involves one lawyer who represents several net winners being sued by the trustee. Published in 2015, a report by the trustee’s expert said that Madoff had always operated as a Ponzi scheme.
Contrary to the unrebutted expert’s report, the lawyer was seeking to show that Madoff was not a Ponzi scheme from top to bottom. To that end, the lawyer pursued a discovery request hoping to turn up trading records that, she hoped, would show that Madoff actually purchased securities matching up with securities allegedly contained in customers’ accounts. In substance, the lawyer wanted the trustee’s counsel to comb through 30 million documents and an additional 13,000 boxes.
On consent, the discovery motion was referred to a retired judge serving as a discovery arbitrator. He denied the motion. The lawyer appealed, but Judge Bernstein upheld denial of the motion after de novo review.
Judge Bernstein’s Findings
Judge Bernstein said that the lawyer’s discovery motion was “based on the false narrative that the Trustee is a liar” who made representations that were “totally false.” She also accused the trustee of “deliberate concealment of material evidence.” In addition, she accused the trustee’s expert of perjury.
Judge Bernstein said the lawyer “knew before she ever served any discovery in these cases that the statements were false.”
After denying the discovery motion in August 2019, Judge Bernstein gave the trustee leave to file a motion to recover his fees and expenses under Rule 37(a)(5)(B).
If a discovery motion is denied, the rule says that “the court . . . must . . . require the movant, the attorney filing the motion, or both, to pay the party . . . who opposed the motion its reasonable expenses . . . , including attorneys’ fees.”
The rule goes on to provide that “the court must not order this payment if the motion was substantially justified or other circumstances make an award of expenses unjust.”
Judge Bernstein concluded that the discovery motion was not substantially justified. “Most disturbing,” he said, “were [the lawyer’s] misstatements of fact to justify forcing the Trustee to undertake an onerous search” entailing “the production of the entire [Madoff] Database.” He also said the lawyer had “falsely accused” the trustee of “deliberately concealing” documents that would prove the defendants’ allegations.
On the bottom line, Judge Bernstein awarded the trustee $57,347, including about $6,000 for the fees of the discovery arbitrator.
Here’s a cautionary tale from the liquidation of the Bernard Madoff Ponzi scheme: For having lost a discovery motion, Bankruptcy Judge Stuart M. Bernstein of Manhattan directed the lawyer to pay the trustee $57,347 under Rule 37(a)(5)(B) in reimbursement of the trustee’s attorneys’ fees and expense incurred in defeating the motion.
Representing defendants in a fraudulent transfer suit, the lawyer was on the losing side of a protracted motion seeking to compel the Madoff trustee to review 30 million documents and the contents of 13,000 boxes.
Although Rule 37(a)(5)(B) provides that the sanction may be imposed against both the lawyer and the client, Judge Bernstein decided in his March 20 opinion to absolve the clients of liability because the “unjustifiable position” was attributable to the lawyer. According to the judge, the lawyer “perpetuated the myth” that Madoff had actually purchased securities with monies invested by customers.
Discovery in the SIPA Liquidation
In the Madoff liquidation under the Securities Investor Protection Act, the Second Circuit has held that customers who took out more cash than they invested were the recipients of fraudulent transfers with “actual intent,” even if they did not know there was fraud afoot. Customers in that category are known as “net winners.”
The payments to net winners were fraudulent transfers because the money Madoff used was stolen from other customers and did not represent a return of the customers’ own investments. The Madoff trustee is now engaged in suing net winners who have not settled.
Judge Bernstein’s 43-page opinion involves one lawyer who represents several net winners being sued by the trustee. Published in 2015, a report by the trustee’s expert said that Madoff had always operated as a Ponzi scheme.