There have been recent media reports respecting efforts of Trustee Irving Picard to make a substantial distribution of up to several billion dollars to Madoff victims in the near future. This Installment will discuss a potential impact that such a distribution may have on the diverse and somewhat divergent interests among the Wilpons that are parties to the global Settlement Agreement with Picard and how the Wilpons may address such an impact.
Installments 75 and 76 in this blog series, which may be read for context with this Installment, discussed concerns about the inclusion of the Wilpons' private charitable Foundations in the Settlement Agreement. (Capitalized terms not otherwise defined herein shall have the meanings assigned to them in Installment 75.)
Such earlier Installments focused on a possible dichotomy between the interests of the Foundations and the individuals who are their fiduciaries and suggested an analysis of (i) the duty of loyalty of such fiduciaries and (ii) their need to avoid conflicts of interest and prohibited “private benefit and inurement” under U.S. Treasury Regulations. What is clear is that many individual Wilpons beyond the Foundation Fiduciaries should be addressing concerns respecting potential duties of loyalty and the need to avoid conflicts of interest, including fiduciaries (collectively, “Fiduciaries”) of the numerous business entities, family trusts that may even include minors and unborn children as beneficiaries, estates and other entities or multi-party arrangements that are affected by the Settlement Agreement (collectively, the “Entities”). Numerous signatories of the Settlement Agreement were acting not only in their individual capacities, but as partners, officers, trustees, executors or members or in some other fiduciary capacity.
Simply stated, how can the Wilpons as a group fairly treat the Entities and individuals who are signatories to the Settlement Agreement and have been recognized by Picard (the “Allowed Parties”) to have $178 million in aggregate allowed net equity claims against the Madoff Estate (“Allowed Claims”)? The Allowed Parties would receive a pro rata share of future cash distributions to Madoff victims by Picard (“Picard Distributions”) but for the Settlement Agreement, which requires that Picard Distributions on account of the Allowed Claims will not be paid but will serve as offsets against the $162 million in aggregate Wilpon liabilities to the Madoff Estate (“Wilpon Liabilities”) by those of the Wilpons that had received six-year transfers from Madoff in excess of principal (“Wilpon Obligors”).
In reaching their global Settlement Agreement with Picard (which included representations by the Wilpon signatories that they had the right to execute and carry out the Settlement Agreement in their respective individual and fiduciary capacities), the Wilpons should have considered resolving potential duty of loyalty and conflicts of interest issues of the Fiduciaries. Otherwise there can be a myriad of future complaints from beneficiaries of Entities, especially those of the Allowed Entities, that their Picard Distributions should not have been used for the benefit of the Wilpon Obligors to pay for Wilpon Liabilities. Additionally, destruction of numerous Wilpon estate and gifting plans and incurrence of gift tax exposure for certain of the Wilpons could result from the use of Allowed Claims to satisfy Wilpon Liabilities.
One way to have addressed such a complex and diverse situation would appear to be an agreement among all of the Wilpons similar to that of a “tax sharing agreement” (a sample appears here). A tax sharing agreement, as discussed in U.S. Treasury Regulations, allocates the federal income tax liability of individual members of a consolidated group for which a single tax return is filed and a single amount is paid to the Internal Revenue Service. Under a tax sharing agreement, each of the individual members of the consolidated group has its own tax obligation or tax loss calculated as if it were taxed separately and not as a member of the group. A member of the consolidated group that individually would have had a loss for tax purposes is entitled to compensation for the use of the loss to reduce the tax liability for the consolidated group. Conversely, a member of the group that individually would have had taxable income would be required to compensate another member(s) for using such other member’s loss to reduce or eliminate the tax liability of the consolidated group. Under the Treasury Regulations, if one member owes a payment to a second member, the first member is treated as indebted to the second member. If the obligation is not paid, the amount not paid generally is treated as a distribution, contribution, or both, depending on the relationship between the members.
Similarly, to avoid future uncertainties, the Wilpons could forge an agreement ( “Allocation Agreement”), with adequate advice of counsel for the involved parties, to provide a method for Allowed Entities to be compensated for the use of their Allowed Claims for the benefit of the Wilpons and the Wilpon Obligors to offset Wilpon Liabilities under the Settlement Agreement. The Allocation Agreement would reduce potential exposure of Fiduciaries to objections from beneficial holders of Allowed Claims that they were denied their cash Picard Distributions. However, if the Wilpon Obligors cannot or do not make immediate cash payments under an Allocation Agreement to Allowed Entities (and individuals with Allowed Claims) when Picard Distributions are made, the terms as to when and how deferred payments are to be made and provisions for any interest or other consideration for such deferrals can be problematic and complex.
Payments among the Wilpons under such an Allocation Agreement could prove to be significant. While the Wilpons may have successfully limited their external cash outlays to the Madoff Estate under the Settlement Agreement with Picard, resolving rights and obligations among Allowed Parties and Wilpon Obligors could result in an appreciable shifting of assets among the Wilpons.