The Problem with Multiple Accounts in Ponzi Scheme Clawback Actions

The Problem with Multiple Accounts in Ponzi Scheme Clawback Actions

 Can different but related account holders offset losses in one account against gains in another account? Can a husband and wife with separate accounts offset losses in one account against gains in the other? When there is a family trust, can the trustee and beneficiary offset gains in the trust account with losses in the trustee’s personal account?

These questions can arise when a Ponzi scheme has ended up in an insolvency proceeding and the trustee or receiver is suing the net winner account holder for the return of the net winnings in the one account on a fraudulent transfer theory.

The ways that multiple accounts may be set up for individuals investing in a Ponzi scheme case are endless: husband and wife jointly; husband and wife with separate accounts; their family trust; an individual and his wholly owned LLC or corporation; a partnership and its individual partners; and so on.

Does it matter how the accounts were funded (whose money was put in), or whether the beneficial owner of the two accounts is the same entity? Or is it just the name on the account that matters?

A recent Eleventh Circuit decision considered the question of whether the lower court had properly found that the profits in a trust account could not be offset against the liabilities in the husband and wife’s personal accounts. Wiand v. Brian L. Meeker, as Trustee for the Brian L. Meeker Trust, 2014 U.S. App. LEXIS 13700 (11th Cir. July 15, 2014) [an enhanced version of this opinion is available to lexis.com subscribers]. The husband and wife argued that, because the husband is the beneficiary of the trust, losses in his and his wife’s accounts should have been considered to offset the profits in the trust account. The Eleventh Circuit affirmed the lower court’s determination that offset was not proper and explained:

Setoff is permitted only where there is mutuality of claims between the parties. Griffin v. Gulf Life Ins. Co., 146 So. 2d 901, 903 (Fla. 1st DCA 1962) [enhanced version]. Mutuality of claims requires that the claims exist between the same parties acting in the same capacities. Everglade Cypress Co., 148 So. 192, 193 [enhanced version]. An individual's role as trustee is legally distinguishable from his individual identity. See Harris v. Martin, 606 So. 2d 1212, 1212-13 (Fla. 5th DCA 1992) (declining to uphold the execution of a deficiency judgment against a party in his individual capacity where the pleadings and judgment in the trial court identified him in his role as trustee) [enhanced version].

Other courts have also considered similar issues and have reached differing conclusions. In Moran v. Goldfarb, 2012 U.S. Dist. LEXIS 100491 (S.D.N.Y. July 16, 2012) , the court also declined to permit an offset between two accounts. In that case, the accounts were held in the names of a father and a son, and they were separately funded by funds of the father and funds of the son [enhanced version].

The Moran court relied on two circuit decisions to support its conclusion. In Scholes v. Ames, 850 F. Supp. 707, 713 (N.D. Ill. 1994), aff’d 56 F.3d 750 (7th Cir. 1995), the court held that "a claim arising out of an independent transaction with one party may not be used as a set-off against another independent claim, even if the transaction is related to the claim in dispute [enhanced version]."  Notably, the court determined that because "the two investments were distinct and made under separate names ..., [the investor] was not entitled to set off the purported profits from the first investment by the loss in the second." Id. In In re Slatkin, 243 Fed. App’x 255, 259 (9th Cir. 2007), the court also found that setoff was not appropriate because "[a]ppellants chose to create ... a separate and distinct legal entity," which, as a matter of law, "destroys the identity of interests required for a setoff [enhanced version]."    

However, a different result was reached in Armstrong v. Collins, 2010 U.S. Dist. LEXIS 28075 (S.D.N.Y. Mar. 24, 2010) [enhanced version]. The defendants in that case had six separate accounts which each had “a distinct name and beneficial owner,” but were each funded by and for the benefit of the defendants. The court ordered the receiver to aggregate the gains and losses from all six accounts to determine the fictitious profits they withdrew.   

The Moran court distinguished Armstrong, finding that the accounts in its case were separately established and funded. It summed up its conclusion as follows:

Neither related-but-distinct entities, nor related-but-distinct people, can offset gains and losses from separate investments in a Ponzi scheme where those investments are separately funded and established and intended for different beneficiaries. Any contrary rule would be a recipe for confusion or mischief, and would risk endangering the equitable distribution to victims of a Ponzi scheme that has long been recognized under the law.

Careful consideration should be made by investors when setting up and funding their accounts, and careful analysis should be done by trustees and receivers when evaluating the net winnings that become the subject of fraudulent transfer litigation. Some courts may look only at the name on the account, where others may look at the equitable interests behind the name. Unfortunately these divergent views only create opportunities for yet more litigation in Ponzi scheme cases and, therefore, more expense and delay.

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

Kathy is also the author of is Ponzi-Proof Your Investments: An Investor’s Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams. For more information, or to purchase the book, click here.

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

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