If they didn’t settle, customers in the Bernard Madoff Ponzi scheme who took out more than they invested are going to pay a high price for engaging in 10 years of fruitless litigation. Chief Bankruptcy Judge Cecelia G. Morris indicated in her first decision on the issue that she will impose prejudgment interest at the rate of 4%, commencing in November 2010.
It did not avail the defendants to claim they were victims of Madoff’s fraud. Judge Morris awarded prejudgment interest because the defendants were holding money for 10 years that had been stolen from other customers while they were proffering defenses consistently rejected by the courts.
On top of repaying every dollar of the so-called fictitious profits they received within two years of the Madoff bankruptcy, those who did not settle will end up paying almost 50% more, assuming Judge Morris compounds interest annually. And let’s not forget, the defendants have been paying attorneys’ fees in a losing cause for 10 years.
Had the defendants settled 10 years ago, they might have settled for less than their fictitious profits and would have avoided a mountain of attorneys’ fees. Continuing to litigate in the face of impending doom may have resulted either from bad judgment by the defendants or poor legal advice.
The Trial in September
Taking over from Manhattan Bankruptcy Judge Stuart M. Bernstein who is retiring, Judge Morris held a trial in September regarding the accounts held by a couple who had been investing with Madoff since 1995.
Madoff’s fraud was disclosed in 2008, followed quickly by a liquidation in the Manhattan Bankruptcy Court under the Securities Investor Protection Act. SIPA incorporates large swaths of the Bankruptcy Code, including avoidance actions for the recovery of fraudulent transfers under Section 548.
In litigation all the way to the Second Circuit, courts established years ago that customers were the recipients of fraudulent transfers with “actual intent” if Madoff had paid them more cash than they had invested. Consequently, customers branded as net winners were obliged to return fictitious profits received within two years of the Madoff bankruptcy. Profits were fictitious because Madoff never bought a single share of stock with customers’ investments.
The Madoff trustee sued in November 2010. The couple going to trial in September conceded they had been paid about $2.8 million in fictitious profits within two years of bankruptcy. At trial, they raised an argument that had been rejected by the court almost a year earlier: Madoff’s conversion from a sole proprietorship to a limited liability company in 2001 did not give rise to a defense that would protect net winners.
Prejudgment Interest
Because the legal and factual issues regarding liability had been decided in the Madoff liquidation, Judge Morris ruled with little ado that the “Defendants’ fictitious profits must be turned over to the Trustee.” She moved on to the question of prejudgment interest. Because neither side presented evidence, she addressed the issue as a question of law.
Judge Morris cited the Supreme Court for saying that prejudgment interest is warranted if (1) necessary to compensate the plaintiff fully, (2) the relative equities indicate that interest is fair, and (3) the remedial purpose of the statute will be served.
The customer-defendants argued that they were Madoff’s victims. Judge Morris gave the contention short shrift. “Although it may be true that Defendants were not responsible for [Madoff’s] fraud, the purpose of prejudgment interest is to make the Plaintiff whole rather than to punish Defendants or to provide Plaintiff with a windfall.”
Judge Morris said that prejudgment interest is “‘normally’ awarded in avoided transfer cases ‘to compensate for the value over time of the amount recovered,’” quoting the late Bankruptcy Judge Burton Lifland, who had initially presided over the Madoff liquidation.
Judge Morris decided that “prejudgment interest is warranted in this instance. The Trustee is charged with collecting fictitious profits from net winners so that net losers in [the Madoff] Ponzi scheme may be compensated for their losses.”
The net losers, Judge Morris said, “are the real victims of Defendants’ dilatory litigation tactics.” She observed that the trustee “has spent approximately ten years prosecuting these cases [and] has spent time and incurred costs litigating against Defendants who have resisted the law of the case.”
Despite learning 10 years ago that Madoff was conducting a Ponzi scheme where they had received money stolen from other investors, Judge Morris said that they “have spent nearly a decade litigating this dispute.” They “had plenty of opportunities to resolve this case prior to the September 14, 2020 trial.”
Not only did they go to trial on an issue decide against them a year earlier, they delayed the trial by engaging in “gamesmanship,” Judge Morris said. When the trial had been scheduled for late 2018, they withdrew their claim and attempted (unsuccessfully) to have the suit withdrawn from bankruptcy court.
Deciding that prejudgment interest was warranted, Judge Morris turned to the amount. She decided against using the 9% state rate because the trustee was asserting federal claims. When the federal judgment rate in 28 U.S.C. § 1961 is too low to compensate the plaintiff, Judge Morris said that the court may impose the prime rate of interest.
The federal rate would have been less than 1%. To compensate the trustee “more fully,” Judge Morris chose to award interest from the date of the filing of the complaint at 4%, the prime rate in effect when the suit began.
At 4% simple interest, the judgment will include prejudgment interest of more than $1.1 million. If interest is compounded annually, prejudgment interest would exceed $1.3 million.
Observations
For litigants in the defendants’ position, was it worth it? Was it a mistake to litigate for 10 years? Did counsel adequately apprise the clients about the possible outcome?
The mark of a good lawyer is knowing when to hold ’em and when to fold ’em.
If they didn’t settle, customers in the Bernard Madoff Ponzi scheme who took out more than they invested are going to pay a high price for engaging in 10 years of fruitless litigation. Chief Bankruptcy Judge Cecelia G. Morris indicated in her first decision on the issue that she will impose prejudgment interest at the rate of 4%, commencing in November 2010.
It did not avail the defendants to claim they were victims of Madoff’s fraud. Judge Morris awarded prejudgment interest because the defendants were holding money for 10 years that had been stolen from other customers while they were proffering defenses consistently rejected by the courts.
On top of repaying every dollar of the so-called fictitious profits they received within two years of the Madoff bankruptcy, those who did not settle will end up paying almost 50% more, assuming Judge Morris compounds interest annually. And let’s not forget, the defendants have been paying attorneys’ fees in a losing cause for 10 years.
Had the defendants settled 10 years ago, they might have settled for less than their fictitious profits and would have avoided a mountain of attorneys’ fees. Continuing to litigate in the face of impending doom may have resulted either from bad judgment by the defendants or poor legal advice.