The Ponzi Scheme Presumption: Equal Application to Investors, Employees and Charities?

 The Ponzi scheme presumption can establish that a transferor made a transfer of property with the actual intent to hinder, delay, or defraud creditors of the debtor. See Phelps and Rhodes, The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes, § 2.03[1] (citing cases).

Some courts have interpreted that presumption broadly, finding that even a trustee of a nondebtor entity that is commonly controlled by the fraudster can get the benefit of the presumption. Stoebner v. Ritchie Capital Management, L.L.C. (In re Polaroid Corp.), 2012 Bankr. LEXIS 1926 (Bankr. D. Minn. April 30, 2012) [an enhanced version of this opinion is available to lexis.com subscribers].

Other courts, however, have interpreted the presumption more narrowly, finding that the challenged transfer must be made in furtherance of the scheme. See e.g., Kapila v. Phillips Buick- Pontiac-GMC Truck, Inc. (In re ATM Financial Services, LLC), 2011 Bankr. LEXIS 2394, at *17-18 (Bankr. M.D. Fla. June 24, 2011) [enhanced version]; Picard v. Cohmad Securities Corp. (In re Bernard L. Madoff Inv. Sec. LLC), 454 B.R. 317 (Bankr. S.D.N.Y 2011) [enhanced version] (“it is conceivable that "certain transfers may be so unrelated to a Ponzi scheme that the presumption should not apply").

Recently, the court in In re Petters Company, Inc., 2013 Bankr. LEXIS 2838 (Bankr. Minn. Jul 12, 2013) [enhanced version], considered what “in furtherance of” the Ponzi scheme means. The court noted that payments to investors “might be considered the central apparatus of the Petters Ponzi scheme . . .” but went on to consider payments made to employees of the debtor as well as donations made to charitable organizations. Are such payments “in furtherance of” the Ponzi scheme?

The court noted that “As to charities, a basis for applying the presumption must be different if it is to be recognized; by their nature, the charities favored by Tom Petters were outliers to the scheme that had no profit motive in their transacting with the Debtors.” Id. at *60. However, the court observed that there are circumstances in which “charitable giving may be considered ‘in furtherance of’ a fraudulent scheme as a matter of fact” such as “where the giving was connected with actual transactions within the scheme's central operation (the phenomenon of cultivating customer good will by donating to the customer's favorite charity) or it was well-publicized (with the semblance of business profitability being strong enough to enable such donations, adding to the public luster of the scheme's vehicle and its individual purveyor).”

The court also considered whether payments to employees were in furtherance of the scheme. Thoughtfully, the court contemplated different types of involvement on the part of employees. Generally speaking, the court observed that employees’ services “kept the edifice standing” but then noted that they “may not have been involved in actually fraudulent conduct themselves.” Id. at *64 “[S]ome of the employee-defendants were compensated at very high, perhaps extraordinarily high levels. Others are said to have received only a modest end-of-year bonus.” Id. (footnote omitted).

The court ultimately let stand the “in furtherance” allegations in the trustee’s complaint as to employees’ payments, finding:

Unfortunately, given the current posture of the litigation in motions for dismissal, there was no defensible line to be drawn to separate out those who eventually could be vindicated on such a theory of defense but who would be unfairly burdened in the meantime. The point is, as to this whole group of defendants there is no deficiency in the Trustee's pleading of the causal element for the triggering of the Ponzi scheme presumption, either.

Id. at *65.

On the application of the Ponzi scheme presumption to the various classes of defendants, the court held:

The "Ponzi scheme presumption" is a viable means of fact-finding for the Trustee's theory of actually-fraudulent transfer under applicable statute. The Trustee's pleading as to the making of transfers by one or more Debtors "in furtherance of" a Ponzi scheme is sufficient, as to all classes of defendants: lenders to the Debtors, recipients of charitable donations from the Debtors, and employees of the Debtors.

The Petters court has adopted a fact-intensive approach to determining the scope of the Ponzi presumption in actual fraudulent transfer litigation in Ponzi cases. This approach sensibly balances two crucial considerations - the reality that a Ponzi scheme perpetrator makes all or virtually all transfers as part of the scheme, but that  every defendant has the right to enforce the trustee’s burden of proving the claim that a particular transfer was “in furtherance” of that scheme.

Read additional articles at The Ponzi Scheme Blog

Kathy Bazoian Phelps is the co-author of The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes  (LexisNexis 2012), along with Hon. Steven Rhodes.  The Ponzi Book, recently reviewed by the ABI Journal and Commercial Crime International, is available for purchase at www.lexisnexis.com/ponzibook, and more information about the book can be found at www.theponzibook.com

Watch Kathy’s interview on the The Not So Legal Show.

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