Picard vs. Wilpons: Does the Pending Trustee Lawsuit Chill Meaningful Opportunities for Sales of Interests by the Mets Owners? - Installment 58
This Installment will address the potential legal disabilities that exist under the New York Debtor and Creditor Law for the Wilpon/Katz families, the owners of the New York Mets (collectively, the “Wilpon Interests”), in their effort to sell a minority interest(s) in the Mets, in light of the existence of the lawsuit against them (the “Wilpon Case”) by Irving Picard, the Trustee in the Bernard L. Madoff bankruptcy. Installment 57 in this blog series focused on the whirlwind of court proceedings in mid-August respecting the Madoff bankruptcy and their potential impact on the Wilpon Case.
Two weeks after these courtroom events, it was reported that negotiations had been terminated between the Wilpon Interests and David Einhorn (the “Einhorn Negotiations”) that could have provided $200 million to the Wilpon Interests in exchange for a minority interest in the Mets. Such minority interest, however, reportedly could have ripened under the Einhorn Negotiations into a majority interest under certain circumstances after the passage of time. A number of journalists who are closely following the Wilpon Case have discussed a variety of reasons for the breakdown in the Einhorn Negotiations.
On September 1, 2011 Richard Sandomir, with the contribution of Ken Belson, published an article in The New York Times entitled “Deal to Sell Piece of Mets to Einhorn Falls Apart,” which provided insights into the termination of the Einhorn Negotiations. Among other things, the Sandomir article ascribed the breakdown to:
(i) Mr. Einhorn’s view that “the Mets sought changes to their agreement. . ., setting the stage for the rupture”;
(ii) “[H]is [Mr. Einhorn’s] disappointment at the Mets’ opposition to a provision that would have given him preapproval [by Major League Baseball] to be the team’s majority owner; and
(iii) The Mets owners’ shift in tactics to “seeking to attract people willing to buy what amounts to a vanity share in the Mets,” rather than one large buyer.
On the same day, Adam Rubin wrote an article for ESPN.com entitled, “David Einhorn, Mets fail to reach deal.” The Rubin article pointed out that, among other things including items covered in the Sandomir article, a source also said that "Einhorn's claim that the Mets kept changing terms at the last minute was not accurate and that it was actually Einhorn who thought the Mets were in a compromised position and tried to bend the terms to his advantage."
Clearly there are differing perceptions and reports as to the fundamental reasons for the breakdown in the Einhorn Negotiations. However, one area that was not addressed was the potential impact that the pending Wilpon Case may have on the ability of the Wilpons to make a single large deal as opposed to multiple potential smaller deals with “vanity” investors.
It is likely that there should be concern by Mr. Einhorn and similarly situated large potential purchasers of interests in the Mets that a conveyance by the Wilpon Interests, in light of the serious financial stress that the Wilpons are experiencing and the pending Picard lawsuit, could come under possible attack by Picard as a "fraudulent conveyance" lacking "fair consideration" under Section 273-a of Article 10 of the New York Debtor and Creditor Law (the “Law”). provides the following:
§ 273-a. Conveyances by defendants. Every conveyance made without fair consideration when the person making it is a defendant in an action for money damages or a judgment in such an action has been docketed against him, is fraudulent as to the plaintiff in that action without regard to the actual intent of the defendant if, after final judgment for the plaintiff, the defendant fails to satisfy the judgment.
Section 272 of the Law defines "fair consideration" in relevant part as follows:
§ 272. Fair consideration. Fair consideration is given for property, or obligation, a. When in exchange for such property, or obligation, as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied, . . .
Section 279 of the Law reads as follows:
§ 279. Rights of creditors whose claims have not matured. Where a conveyance made or obligation incurred is fraudulent as to a creditor whose claim has not matured he may proceed in a court of competent jurisdiction against any person against whom he could have proceeded had his claim matured, and the court may,
a. Restrain the defendant from disposing of his property.
b. Appoint a receiver to take charge of the property,
c. Set aside the conveyance or annul the obligation, or
d. Make any order which the circumstances of the case may require.
Using the Einhorn transaction as an example, this posting will show the potential application of the foregoing provisions of the Law. If Mr. Einhorn or another single investor were to sink $200 million or more in the future prospects of the Mets, there is a real possibility that the transaction can be attacked under the previously cited Sections of the Law by the Trustee. Because Mr. Einhorn was reportedly seeking ultimate control or ownership of the Mets for the $200 million if the Wilpon Interests failed to repay the amount after some passage of time, there may be arguments made by the Trustee that what is being really currently conveyed now is future control of the Mets and what should be “fair consideration” for the prospective current sale of control of the Mets. It is certainly arguable by him that the Wilpon Interests are not currently ready, willing and able sellers of Mets interests with no constraint to sell; therefore, the $200 million may be a bargain price for the to control the Mets in the future.
Smaller sales to “vanity” purchasers with no prospects to characterize the sales as a potential future change in control of the Mets may be less susceptible to attack under the Law.
While the questions of "fraudulent transfer" and "fair consideration" may be challenging, complex and difficult in this context or, even a stretch because of the countless personal and business involvements of the Wilpon Interests, the creative arguments and inclinations of Picard in the Wilpon Case and other cases have had few limits so far.
[To be continued in Installment 59]
(Michael J. Kline, the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)