Attorneys provide legal services, bill
for them, and hope to get paid. Sometimes, they even get paid. When attorney
fees meet up with Ponzi schemes, however, the game changes, and attorneys face
a host of additional problems relating to their fees, even if the attorneys and
the services they provided were not at all involved in or related to the Ponzi
scheme. Two recent decisions in Ponzi cases highlight a few of the problems
that can be encountered: one in trying to collect fees from a government
forfeiture proceeding, and the other in defending the attempted disgorgement of
fees already paid on fraudulent transfer theories.
In United States v. Madoff, 2012
U.S. Dist. LEXIS 48733 (S.D.N.Y. Apr. 3, 2012) [an enhanced version of this opinion is available to lexis.com subscribers],
the firm of Epstein, Becker & Green, P.C. ("EBG") was forced to do battle
with the government in seeking payment of fees earned from settlement proceeds
that turned into forfeited funds. EBG had performed legal services for Ruth
Madoff that were unrelated to her husband's Ponzi scheme. Those services
resulted in settlement of a suit in her favor in the amount of $61,993. EBG's
fees for this were $24,790.86. In the meantime, however, Bernard Madoff was
arrested and convicted, and the district court entered a forfeiture order
against most of the Madoffs' property, including the proceeds of Ruth's suit.
EBG's then took the only recourse that was available to it at that point
- to submit a claim in the forfeiture action under 21 U.S.C. § 853(n) [an annotated version of this statute is available to lexis.com subscribers].
Specifically, it asserted that it held a legal interest superior to that of the
government under § 853(n)(6)(A) and that it was a bona fide purchaser for
value, under § 853(n)(6)(B).
The court, however, dismissed these claims,
holding, "To have a claim in the specific property, a creditor, therefore, must
secure a judgment or perfect a lien against a particular item." The court further
held, "To enforce a lien under the [applicable New Jersey] Act, an attorney
must file an application with the court; otherwise, the attorney will lose the
right to assert an attorney's lien against any proceeds derived from his
services." Because EBG had not filed such an application, it was merely a general
creditor without a legal interest superior to that of the government.
The court further noted that even if EBG had a valid claim to the
lawsuit proceeds, it would not have been a superior interest because of the
relation back doctrine. Under that doctrine, the government's interest in the
Madoff's property arose when his crimes were committed beginning at least as
early as the 1980s, well before Ruth's lawsuit was settled.
Finally, the court also rejected EBG's claim that it was bona fide
purchaser for value. It held that as a general creditor without a legal
interest in the settlement funds, EBG had no standing to assert such a claim
under § 853(n)(6)(B).
In the second case, Silverman v.
Meister Seelig & Fein, LLP (In re
Agape World, LLP), 2012 Bankr. LEXIS 911 (Bankr. E.D.N.Y., Feb. 21, 2012) [enhanced version], the law firm ("MSF") provided
legal services to Agape during a time when Agape was conducting a Ponzi scheme.
It billed and collected $400,000 in fees and expenses. After his appointment as
trustee in Agape's bankruptcy, Silverman filed a lawsuit against MSF, including
claims to recover the attorney fees paid on theories of actual and constructive
fraudulent transfer, as well as a claim for malpractice, and many other claims.
MSF moved to dismiss the entire suit, and the court granted much of the
motion on standing grounds. However, the court denied the motion as to the
fraudulent transfer claims.
On the actual fraudulent transfer claim, the court held that the "Ponzi
presumption" worked "to establish fraudulent intent on the part of the
transferor as a matter of law." In support of its motion, MSF asserted there
was no allegation of its fraudulent intent, but the court rejected this argument,
holding that MSF's intent was irrelevant. MSF also argued that it was entitled
to the good faith defense under § 548(c), but the court also rejected this
defense, holding, "it is only sufficient to dismiss these claims at this stage
if it appears from the face of the Complaint that the Defendant took the funds
in good faith and for fair consideration." The court found that Silverman's
complaint adequately alleged MSF's knowledge of Agape's wrongdoing and that
Agape received less than fair value.
The court's more notable holding was on Silverman's constructive
fraudulent transfer claim. MSF argued that as the recipient of its legal
services, Agape received sufficient consideration as a matter of law. But the
court rejected that argument, holding that Silverman had "adequately pleaded
that the Defendant provided less than fair consideration in exchange for the [payments
that it received] because the Defendant acted negligently in its representation
of Agape." At the same time, the court dismissed Silverman's direct malpractice
claim on several grounds, including lack of standing and the in pari delicto doctrine.
Therefore, under the court's holding, even if a trustee's malpractice
claim against a Ponzi perpetrator's attorney is barred by the in pari delicto doctrine, that same
malpractice claim can be sufficient to show a lack of reasonably equivalent
value on a constructive fraudulent transfer claim. This holding effectively creates
a new and potentially important exception to the in pari delicto doctrine, or at least a significant narrowing of
it. It will be interesting to see whether it gains traction among trustees and,
more importantly, courts.
These various types of claims and are
extensively covered in The Ponzi Book: A
Legal Resource for Unraveling Ponzi Schemes by Kathy Bazoian Phelps and
Hon. Steven Rhodes. The
Ponzi Book is available for purchase at www.lexisnexis.com/ponzibook and more
information about the book can be found at www.theponzibook.com.
articles at The
Kathy Bazoian Phelps is the
co-author of The Ponzi Book: A Legal
Resource for Unraveling Ponzi Schemes available for purchase at www.lexisnexis.com/ponzibook.
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