BAM! Madoff Defendants Socked with Substantial Prejudgment Interest

A recent decision from a New York bankruptcy court provides guidance on how federal courts may approach requests for prejudgment interest in fraudulent conveyance cases. The decision, Picard v. BAM LP, highlights a risk faced by defendants in litigation of lengthy duration and provides practical guidance on how federal judges may exercise their discretion regarding prejudgment interest.

Background

BAM is a fraudulent conveyance suit brought by the trustee appointed in 2008 in the aftermath of the exposure of the Bernard Madoff fraud scandal. The defendants had been customers of Madoff since 1998. The aggregate amount of their withdrawals from their accounts exceeded the amounts they had deposited by nearly $7 million. During the two years before the Madoff petition date, the defendants withdrew an aggregate of over $2.75 million. The trustee filed a complaint in 2010 seeking clawbacks under federal and state fraudulent conveyance law. Following years of litigation, a trial was conducted on open issues of fact in 2020 and judgment was rendered in favor of the trustee.

Prejudgment Interest

One of the issues resolved at the trial was the trustee’s request for prejudgment interest, which, as per Wickham Contracting Co., Inc. v. Local Union No. 3, Intern. Broth. of Elec. Workers, AFL-CIO, 955 F.2d 831 (2d Cir. 1992), is awarded at the discretion of the court. The court awarded prejudgment interest for the 10-year period between the filing of the complaint and the end of the trial. The trustee sought application of the New York state rate of 9% per year. The defendants argued for the federal rate of 28 U.S.C. § 1961, which was less than 1%.

The court held that the New York state rate was inapplicable. While the trustee had originally sought relief on both state and federal theories, the Second Circuit’s 2014 ruling in Picard v. Fishman, discussed in our prior alert, determined that all state court theories had to be dismissed due to the bankruptcy safe harbor, leaving only a federal theory of recovery.

The court also rejected the federal rate proposed by defendants. It found that a rate under 1% would not adequately compensate the trustee. Instead, it determined that the prime rate was appropriate, and selected the prime rate as it stood on the Madoff petition date, which was 4%. As a result, the defendants’ exposure includes interest equal to 40% of the original principal exposure.

Analysis

The court chose not to select a floating rate based on the actual prime rate during the applicable 10-year period, but instead chose the rate as it stood at the beginning of the period. As the prime rate has not moved significantly during this time period, the chosen methodology made relatively little difference in this case, and had the virtue of being easier to calculate.

Wickham states that the relative equities may make prejudgment interest inappropriate where the defendant acted innocently, where there was a good faith dispute as to liability, or where the plaintiff was responsible for the delay in recovery. It would seem that the BAM defendants might have been able to benefit from this standard, as they had previously been found to have been without knowledge of the Madoff fraud during its pendency. Furthermore, a considerable portion of the 10-year litigation period was consumed by the Fishman proceeding, which upheld valid defenses asserted by defendants and contested by the trustee, and was not concluded until the trustee’s certiorari petition was denied in 2015. But the court faulted the defendants in general for continuing to litigate after the Second Circuit supported the trustee’s methodology for calculating SIPA net equity claims in 2010, and in particular for seeking to withdraw the reference to the district court in 2018 after the bankruptcy court had first set a trial date.

The cloud of potential prejudgment interest can be a significant concern for defendants, especially in cases where litigation goes on for years. It has not been uncommon for plaintiffs to threaten in settlement negotiations that that they will obtain prejudgment interest at the New York 9% rate, which has been far above market rates for decades. BAM clarifies that the New York rate should not be imposed unless the case is governed solely by state law theories of recovery. In fraudulent conveyances cases, which are typically brought under both federal and state law theories unless the conveyances were made outside of the two-year federal reachback period, it appears that the federal rate will be the applicable one.

As the decision whether to award prejudgment interest is left to the judge’s discretion, one should expect considerable variation from case to case. BAM thus serves as a warning of what can occur if a judge concludes that defendants and their counsel crossed the line from aggressive advocacy to dilatory conduct.