Kathy Bazoian Phelps
Senior Counsel in Ponzi Scheme Litigation
and Bankruptcy Matters

Kathy is a senior business trial attorney with more than 28 years experience prosecuting and defending claims for high net worth clients involved in Ponzi scheme matters and in bankruptcy proceedings. Kathy’s practice includes recovering assets for clients in complex fraud cases under standard fee and alternative fee arrangements. Kathy also serves as a mediator in bankruptcy matters, in complex business disputes, and in matters requiring detailed knowledge about fraud or Ponzi schemes.

Kathy’s Clients in Ponzi Scheme Cases and Bankruptcy Matters
Equity Receivers
Bankruptcy Trustees
High Net Worth Investors
Debtors in Bankruptcy
Secured and Unsecured Creditors

Monday, April 16, 2012

Attorney Fees At Risk in the Aftermath of Ponzi Schemes

Posted by Kathy Bazoian Phelps

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), 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). 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).

Third party claims in forfeiture actions are increasingly common, given the rise in Ponzi cases. These types of claims are extensively covered in § 16.04 of The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes.

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), 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.

Actual and constructive fraudulent transfers and the defenses to these claims are fully covered in chapters 1, 2 and 3 of The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes.


  1. Due process requires the government to provide 'notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.


    1. This is an important point about the requirements of due process in a forfeiture proceeding. In this case, it appears that Epstein, Becker & Green received its due process rights to notice and an opportunity to be heard, and that it simply lost on the merits of the case.