The owners of the New York Mets cut a $162 million deal to settle a lawsuit over their investments with Bernard Madoff, heading off a high-stakes jury trial that could have cost them control of the baseball team.
Irving Picard, the court-appointed trustee for Mr. Madoff's firm, had sued the Mets owners, Fred Wilpon and Saul Katz, as well as their families and business associates for more than $300 million they invested with Mr. Madoff, who pleaded guilty to fraud charges three years ago.
As part of the settlement announced in Manhattan federal court Monday, the Mets owners won't have to make a payment for three years, at which point the amount they will have to produce could be far less than $162 million.
That is because the payment can be made using any recoveries the Mets owners and business partners—as former investors—were due from the bankruptcy estate, which amount to about $178 million. If that amount adds up to more than $162 million, Messrs. Wilpon and Katz and their business partners will pay nothing. If it is less than $162 million, they will personally guarantee up to $29 million of the settlement.
Whatever happens, the Wilpons appear to have the wherewithal to keep the team for years to come, which was always their stated goal.
However, the franchise will undoubtedly have to operate differently than before the Madoff scandal broke; the trustee had alleged the Mets owners tapped into their investments with Mr. Madoff to make up for cash crunches during the season.
Mr. Sheehan, the lawyer for the trustee, said the settlement now aligns the goals of the Mets owners and the trustee—they can benefit as a result of the trustee's recovery efforts. "In a sense, we're now partners," Mr. Sheehan said.
The agreement includes a provision that neither side can make disparaging remarks about the other, which caused Judge Jed Rakoff, who read out details of the settlement, to quip: "Love is wonderful."
The stakes were high in the case. The Mets owners couldn't afford to repay the $300 million in principal invested and later withdrawn that Mr. Picard was additionally seeking, say people familiar with the team's finances and with the Wilpon family. A loss during trial could have forced them to sell additional stakes in the team and could have possibly lost them majority control of the team.
Messrs. Katz and Wilpon both said outside the courthouse that they were "very pleased" with settlement. "Now I guess I can smile," said Mr. Wilpon, wearing a navy suit and sunglasses.
For Mr. Picard, who has suffered a series of legal setbacks in court, a loss at trial could have been a blow to his reputation and may have also provided a road map for defendants in other lawsuits. Mr. Picard has filed more than 1,000 lawsuits, and has so far recovered about $11 billion of the $17.3 billion in invested principal estimated to be lost in the Madoff fraud.
Mr. Picard had contended the Mets owners were "willfully blind" to signs that Mr. Madoff was carrying out a massive fraud. The Mets owners said they had no inkling and were victims like thousands of others.
As part of the settlement, which requires court approval by April 13, Mr. Picard dropped his claims of willful blindness.
"The settlement we announced in court confirms that Mr. Wilpon and Mr. Katz and their partners acted at all times in good faith and didn't act willfully blind," said Robert Wise Jr., a lawyer for the Mets owners.
The settlement resolves all claims by Mr. Picard against the Mets owners and their business partners, including any amount they would have paid under a prior court ruling that they must return "fictitious profits" withdrawn in the two years before Mr. Madoff's scheme collapsed. The trustee had claimed that amount was as much as $83.3 million.
Ever since the Madoff scandal broke in 2008, a cloud has hung over the team, since the Mets owners allegedly used money from their Madoff accounts to make up for shortfalls and financial losses.
While those cash reserves may no longer exist, people familiar with the team's finances say the settlement means the Wilpon family will be able to hang on to the franchise, in spite more than $500 million debt related to the team and regional sports network SNY.
In the wake of the Madoff crisis, the Wilpons refinanced much of their debt, taking out loans of about $400 million against the team and their 65% stake in SNY, with a substantial portion of it due in 2014. The team also borrowed $25 million from Major League Baseball and an additional $40 million from Bank of America Corp. BAC +0.10% The owners shed $50 million of players' salaries over the winter, after the team lost as much as $70 million amid dwindling attendance.
However, the people familiar with the team's finances said those debt levels are in line with the value of the assets and will not cause any additional financial strain, though the days of signing high-priced free agents appear to be over.
David Sheehan, a lawyer for the Mr. Picard, said the settlement was reached Friday after talks between the parties heated up earlier in the week. Messrs. Wilpon and Katz weren't directly involved in the discussions, he said.
"It isn't whether we win or lose, it's that we enhance the fund for the victims," Mr. Sheehan said.
Former New York Gov. Mario Cuomo, the court-appointed mediator in the case, said in an interview that early on in the negotiations, he sensed that Messrs. Katz and Wilpon were upset that their reputations had been suddenly "besmirched" by the allegation that they turned a blind eye to Mr. Madoff's fraud.
Mr. Cuomo said the two businessmen had two options. "One of the ways would have been to try the case and win," he said. But Mr. Cuomo urged them to settle. "What I said to them is 'look, if we can find a decent way to settle this thing, much of the reputation that you lost can be won back.'" Mr. Cuomo said he made that point more forcefully as the date to trial loomed closer.
Mr. Cuomo also credited Judge Jed Rakoff for helping to steer the two sides toward a settlement. "Every time he spoke, it seemed he developed another forcefield that had to be dealt with. In the end, it helped getting these people to agree."
As the trial convened earlier Monday with an expectation that jury selection would begin, Judge Rakoff told the court: "Although the outcome is an anticlimax, it is always helpful when the parties are positively able to resolve their disputes."