A federal appeals court has ruled a California couple who was swindled by Bernie Madoff can't collect under their American International Group homeowners policy.
AIG is not responsible for paying $30,000 to a California couple who claimed they lost millions invested with Bernard L. Madoff Investment Securities, the U.S. Court of Appeals for the Second Circuit found.
The appellate court agreed with U.S. District Court Judge Paul Crotty's October 2010 ruling.
The plaintiffs, Robert and Harlene Horowitz, claimed the AIG Fraud SafeGuard component of their homeowners policy entitled them to the maximum payout of $30,000. They also sought class-action status to include all holders of similar AIG policies who lost money when Madoff "fraudulently used plaintiffs" and all other class members' investments to perpetuate the largest Ponzi scheme in history, according to an August 2009 court filing.
From 1997 to 2008, the Horowitzes invested a total of $4.3 million and withdrew about $4.5 million from the Madoff account, according to court papers. But they believed the account had grown to about $8.5 million during that time, based on a November 2008 account statement.
AIG had claimed the Horowitzes actually received a $225,000 net gain on their investment.
While a Ponzi scheme is the sort of fraud likely anticipated by the policy drafters, the policy is intended to cover the actual loss of money or property, not an indirect loss of money that never really existed, the appeals court found.
"The only 'thing of value' the Horowitzes were induced to part with by Madoff's lies was the monies they transferred [to him] which, fortunately for them, they have fully recovered," the appeals court said in its decision.
Crotty, the trial court judge, cited legal precedents, including a finding by a U.S. Bankruptcy Court judge in the Madoff case, in ruling the claimed losses never really existed. Losses should be based on clients' original investments, not phantom windfalls, he said.
"The money reflected in the final account statement was not taken from the plaintiffs by fraud; rather, it never belonged to them, or even existed, in the first place due to fraud. Therefore, they did not lose this money; they lost the mistaken belief that they owned this money," Crotty wrote.
The Horowitz lawsuit was originally filed in the U.S. District Court of the Southern District of New York. The couple had a homeowners policy with AIU Holdings Inc. and American International Insurance Company of California that covered losses "directly from fraud, embezzlement, or forgery."
Madoff, the New York investment adviser found guilty of losing more than $50 billion of his clients' funds in a massive fraud, is now serving a life sentence at a federal correctional facility in North Carolina.