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Suit over Madoff losses revived

A Maryland appellate court has partially revived a lawsuit brought by an investment manager and his firm for $10 million in losses related to the Bernard Madoff Ponzi scheme.

The Court of Special Appeals’ decision Wednesday will allow several counts against investment vehicle manager Jack Kay to move forward, reversing a lower court’s motion to dismiss all counts with prejudice.

Those counts include fraud, negligence, gross negligence and reckless misconduct, among others.

However, the court said the investors, George Wasserman and Janice Wasserman Goldsten Family LLC and Anthony Tanzi, trustee of the Lisa W. Gill Trust, failed to state a cause of action for other counts against Kay, his investment firm and real estate firm, including breach of management agreements, civil conspiracy to convert investment vehicle funds, statutory conspiracy to injure and unjust enrichment.

The court also said several counts against Kay’s companies cannot move forward, including breach of fiduciary duty and conversion.

“We can’t sue on behalf of all of the partnerships and LLCs, but we can sue for ourselves and that’s a substantial number, about $3.5 million,” said William Daniel Sullivan, who represented the appellants.

“The court clearly had a sense that the derivative claims were unnecessary and that we could obtain full redress with the direct claims and we are very happy that the court has given us that route,” said Sullivan, who is a partner with Washington, D.C., firm Butzel Long Tighe Patton PLLC.

Attorneys for Kay did not respond to requests for comment.

The Wasserman family has donated heavily to Washington-area charities and Jewish organizations, including the U.S. Holocaust Memorial Museum, the National Gallery of Art, the Jewish Social Service Agency and Jewish Women International.

Kay has also donated locally, providing a $1.5 million gift to his alma mater, the University of Maryland, to establish the Abraham S. and Jack Kay Chair in Israel Studies at the university, to develop the school’s Middle East studies program.

The plaintiffs invested to varying degrees in several entities — two Maryland limited liability companies, four Maryland general partnerships and one Virginia general partnership — set up by Kay, the court held.

Beginning in 2003, the appellants alleged, Kay, the de facto managing member of the investment vehicles, unlawfully took money from the investment vehicles and through his real estate management firm, Kay Management Co. Inc., invested the money with Kay Investment Group LLC.

Kay Investment then invested the money with Madoff entities, and it was lost when the $50 billion Ponzi scheme unraveled in 2008.

The appellants claimed that Kay did this without notifying the members or partners of the investment groups and without their consent. They estimated that Kay received about $800,000 in administrative fees annually for “profits” Madoff reported Kay Investment had earned.

In January 2009, Kay sent letters to the appellants informing them that their money had been lost in the Madoff scheme.

The losses were as follows: Kaywood Garden Apartments LLC lost $4.73 million; Indian Spring Country Club LLC lost $1.03 million; Village Square-Wheaton lost $740,000; Village Square North lost $649,000; Barcroft View Apartments lost $810,000; K.G.W. Associates lost $2.22 million and Kay Construction Co. lost $700,000.

Sullivan said the decision does not allow his clients to go after the money the business entities lost, which he called “disappointing.”

The money was set aside to complete renovations on their rental properties and follow through with deferred maintenance needs; the money will have to be made up somewhere.

“We wanted the general partnerships and limited liability companies to be stable and have the funds that they needed to persist and endure and to be run well over time,” he said. “This decision means that even if they aren’t made whole, at least my clients will be.”

The appellants claimed Kay reimbursed the investment vehicles for administrative fees taken in 2008, but not for the previous six years. They asked the court for the return of all the money lost to Madoff, interest that would have accrued had the money not been invested with Madoff, the fees paid to Kay Management and punitive damages of $5 million.

In July 2009, the appellants filed a complaint against Kay and his companies in Montgomery County Circuit Court.

The lower court dismissed the suit finding that the claims were derivative and the appellants failed to make a demand on the LLCs or show that such a demand would have been futile. The appellants attempted to amend the complaint, but the circuit court would not allow it, and dismissed the case with prejudice.

WHAT THE COURT HELD

Case:

George Wasserman & Janice Wasserman Goldsten Family LLC, et al v. Jack Kay, et al, No. 2836, Sept. Term 2009. Reported. Opinion by Eyler, J., J., retired, spec. assigned. Filed Feb. 9, 2011.

Issue:

Did the lower court err in dismissing all claims as being derivative in nature?

Holding:

Yes; reversed in part. While some of the claims were derivative, the appellants were owed direct duties by the defendant appellee and alleged individual injuries due to breaches of those duties.

Counsel:

William Daniel Sullivan for petitioner; James H. Hulme for respondent.

RecordFax#11-0209-07