As our New Jersey readers probably know, Bernie Madoff is in prison. Despite his incarceration, however, the fallout from his scheme continues. This time, the trouble surrounds a dispute between two hedge funds over the contractual enforcement of a legal agreement to trade nearly $200 million of claims against Madoff's bankrupt firm.
When the trade fell through, Solus Alternative Asset Management LP sued Perry Capital LLC for $20 million. Solus alleges that the two had a legally binding deal based on phone calls and instant messages. Perry disagreed that an agreement existed, legal or otherwise. At issue is whether those phone calls and instant messages qualified as a legal contract that can be enforced by Solus.
Under the law, a trader needs a signed document demonstrating that the seller unconditionally and irrevocably sold, transferred and assigned the claim and all its rights to the buyer. At the same time, according a law professor at Columbia Law School, the sales contract does not need to be in writing. Instead, for a seller to enforce the agreement, they must simply show that the parties had a "meeting of the minds" as well as a final understanding.
The fight comes in the midst of an increase in the value of the claim on Madoff's estate. At the time of the alleged sale, it was worth about 60 cents on the dollar. Now it is valued at roughly 65 cents on the dollar. Because of the increase in value, Solus contends that Perry backed out after realizing it had made a bad deal.
The latest Madoff fallout demonstrates the importance of getting a contract in writing. A dose of prevention at the beginning can save a pound of pain in the future.
Source: San Francisco Chronicle, "Hedge Fund Fight Over Madoff Claims Spotlights Contract Dispute," Linda Sandler, Aug. 8, 2012