On April 3, 2012,
Minnesota Governor Mark Dayton signed a new law, Chapter 151, House File 1384,
designed to protect nonprofits from having to pay back donations made by Ponzi
perpetrators and other fraudulent sources.
The new law actually restricts a trustee's recovery in three distinct
First, it amends Minnesota Statutes §
513.41 to exempt charitable organizations from returning transfers made outside
of a two year statute of limitations.
The current statute of limitation on fraudulent transfer lawsuits is six
years. The new statute effectively
shortens the statute of limitations by amending the definition of a "transfer"
to exclude any transfer more than two years before the commencement of the action,
"Transfer" does not include
a contribution of money or an asset made to a qualified charitable or religious
organization or entity unless the contribution was made within two years of
commencement of an action under sections 513.41 to 513.51 against the qualified
charitable or religious organization or entity and [the transfer was either an
actual or a constructive fraudulent transfer].
Second, even within the two years before
the action is commenced, recovery of constructive fraudulent transfers is
restricted in amount according to a formula that further narrows the definition
of a "transfer," as follows:
A transfer of a
charitable contribution to a qualified charitable or religious organization or
entity is not considered a [constructive] transfer . . . if the amount of that
contribution did not exceed 15 percent of the gross annual income of the debtor
for the year in which the transfer of the contribution was made; or the
contribution exceeded that amount but the transfer was consistent with
practices of the debtor in making charitable contributions.
Those familiar with the Bankruptcy Code
will recognize that this precise limitation applies to a trustee's recovery
under § 548(a)(2). As a result,
substantial case law is available that should assist in interpreting and
applying this new Minnesota restriction.
The third way in which the new Minnesota
statute restricts a trustee's recovery is that these limits are given immediate
effect and are applied to existing lawsuits, as follows:
This section is effective
the day following final enactment and applies to a cause of action existing on,
or arising on or after, that date.
Reactions to the new law have been as
expected. Doug Kelley, the trustee in
the Thomas Petters bankruptcy case pending in Minnesota, had sued several
charities, including the Minnesota Teen Challenge for $2.3 million and the
College of St. Benedict for $2 million.
He has been quoted as saying that the new law could possibly bar him
from collecting between $200 million and $450 million. He also reportedly expressed concern that the
law will turn Petters' investors into two-time victims by reducing their
On the other side, the College of St.
Benedict told the Minneapolis Star Tribune that it "accepted and spent the donations
in good faith from 2003 to 2006 to further its mission," and added, "We are
gratified that a bill recently passed by the 2012 Minnesota Legislature and
awaiting the governor's signature recognizes the position of nonprofits in such
It will be interesting to whether other
states follow Minnesota's lead on this important question.
Issues relating to fraudulent transfer
claims against charities are discussed in The
Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes, by Kathy Bazoian
Phelps and Hon. Steven Rhodes, at §§ 2.03[d] and 3.02. The Ponzi Book is available
for purchase at www.lexisnexis.com/ponzibook. More information about The
Ponzi Book can be found at www.theponzibook.com.
more articles by Kathy Bazoian Phelps at The Ponzi Blog
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