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Non-Profit Victim of Madoff Fraud May Need To Repay Fictitious Earnings

By Howard M. Friedman

Disclosures this week from the non-profit women's Zionist organization, Hadassah, raise interesting questions about the application of New York's Fraudulent Conveyance Act and the federal Bankruptcy Code's fraudulent conveyance provisions to charities that were victims of the Bernie Madoff Ponzi scheme. Jerusalem Post reports that Hadassah announced on Wednesday that it had invested $90 million with Madoff. New York Jewish Week expanded on the announcement, revealing that over the last 20 years Hadassah has withdrawn $130 million from its Madoff accounts, and suggests that under New York law Hadassah may be required to pay back some of these amounts to a Madoff trustee in bankruptcy.

New York's Debtor and Creditor Law, Section 276, provides that any conveyance of property by someone such as Madoff made with actual intent to defraud creditors is a fraudulent conveyance. Also the federal Bankruptcy Code permits a trustee to avoid any fraudulent transfer (11 USC Sec. 548). Cases such as Bear, Stearns Secs. Corp. v. Gredd (In re Manhattan Inv. Fund Ltd.), 397 B.R. 1 (SD NY, 2007)[LEXIS link] hold that there is a presumption that a Ponzi scheme involves actual intent to defraud creditors. Even if Hadassah's withdrawals were the receipt of funds through fraudulent conveyances by Madoff, courts will need to determine how far back they can go in ordering repayments to a bankruptcy trustee or receiver. (See NY Civil Prac. Law & Rules Sec. 213 and 11 USC Sec. 548).

Full post as published by Religion Clause on January 16, 2009 (boomark / email).