The Victim Balancing Act in the Petters Ponzi Scheme Case Continues

The Victim Balancing Act in the Petters Ponzi Scheme Case Continues

 The unique circumstances of Ponzi schemes require careful consideration to mete out justice in unwinding them and in redressing the injuries to defrauded victims. Investors who got out early were often paid back in full, plus some. Other investors who invested later may have received little to nothing. Fraudulent transfer law is used to seek recovery of money paid out to investors, whether earlier or later. Many questions unique to Ponzi scheme cases must be evaluated in the process of trying to do equity. For example:

  • How should courts balance the interests of earlier versus later investors?
  • Should net winners and net losers be treated differently?
  • How far back can the trustee look in seeking to recover money paid to investors?
  • How should courts apply good faith criteria to Ponzi scheme victims asserting a good faith value defense to fraudulent transfer claims, where they relied and trusted family and friends in a typical affinity scheme?

Unfortunately, many judges are either reluctant or unwilling to pause and ponder the special circumstances and dynamics of Ponzi schemes in evaluating these questions. Recently, however, the bankruptcy court in the Thomas Petters Ponzi scheme case took the time to recognize “the patchy and incomplete match between the phenomenon [of failed investment schemes] and the existing state of the law.” In re Petters Co., 2013 Bankr. LEXIS 2523, at *9 (Bankr. D. Minn. June 19, 1013) [an enhanced version of this opinion is available to subscribers]. (The court then cited The Ponzi Book to “highlight the deep underlying tensions in any legal response to failed, large-scale, and long-term fraudulent schemes” due to “shortfalls of existing statutory remedies.”)

“In the law . . . there is no specific, dedicated set of legal remedies to address the failure of a Ponzi scheme, as such.” Id.

The Petters court wrote a thoughtful Preface to its opinion that resolved the statute of limitations issues which arose in response to the trustee’s fraudulent transfer claims. In evaluating what statute of limitations should apply, the court was mindful of the impact in terms of dollars that its decision would have on all parties, noting:

In the most practical sense, the outcomes on these issues could control whether some defendants could be liable to the estates at all; and it could set the outside exposure of other defendants that had longer and more sustained transactional relationships with the Debtors. Conversely, it would either limit or expand the estates’ maximum possible recoveries from the clawback. Ultimately, the ruling would affect the size of the pot of recovered funds from which creditors' readjusted rights would be serviced, after the full task of recapture via avoidance was completed.

Acknowledging the Ponzi scheme “phenomenon,” the Petters court analyzed established boundaries, and the lack of boundaries, in statutory law and the relevant case law in resolving the several statute of limitations questions raised in the case.

The court noted that the Minnesota Uniform Fraudulent Transfer Act does not contain its own statute of limitations, and that perhaps Minnesota was the only state that removed the statute of limitations provision from its version of the Uniform Fraudulent Transfer Act. The court considered two competing interpretations of the statute of limitations: (1) six year limitation period “upon a liability created by statute”; or (2) six years with a possible extension because “the cause of action shall not be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud.” The difference is that the latter interpretation would permit the trustee to reach back for an extended period of time because of the “discovery allowance” period.

The court also considered how to coordinate the statute of limitations restrictions of Bankruptcy Code § 546(a) with the state law statute of limitations. The defendants argued that the two limitations periods of § 546(a) ran at the same time so that the six year state limitations period ran backwards from the date that avoidance action was commenced. The trustee argued that the state statute of limitations was tolled from the entry of the order for relief until the avoidance action was commenced, so the limitations period would run backwards from the date of the order for relief.

Finally, the court also considered the trustee’s request to reach back further based on non-statutory tolling doctrines.

Here are the court’s conclusions on the statute of limitations questions:

Ruling #1: “The Trustee’s avoidance claims under MUFTA are subject to a six-year limitations period. However, the discovery allowance of Subd. 1(6) may operate to extend the scope of transfers subject to avoidance to those made before that six-year period, if the Trustee proves the factual basis for it.”

Ruling #2: “As long as the Trustee commenced any individual action in this avoidance docket by the deadline under § 546(a)(1), his avoidance power can reach, at minimum, transfers that took place within the full length of the six-year base limitations period under Subd. 1(6), dating back from the date of the subject Debtor’s bankruptcy filing.”

Ruling #3A: “The extension of avoidance at the Trustee’s instance under color of the discovery allowance of Subd. 1(6) to any transfer that took place earlier than the six-year base period of that subdivision will turn on whether the predicate creditor for a particular adversary proceeding had discovered the facts constituting the fraud of the Petters Ponzi scheme, as they applied to such a transfer.”

Ruling #3B: “The discovery allowance of Subd. 1(6) is the only basis on which the Trustee may obtain an easing or extension of that six-year period. The doctrines of fraudulent concealment, equitable tolling, and adverse domination are not available to him as bases for tolling as a matter of law, or they do not lie on their merits on the configuration of parties in the Trustee’s litigation.”

These rulings set the boundaries in the Petters case for how far back the trustee can reach to “recapture ill-gotten gains.” The court sought not to subjectively determine “fairness,” but to respect existing law:

Our legal system is structured to protect seated property rights and to promote the reliance that underpins free commerce and the ready flow of capital. A deal is a deal, presumptively final as made; and transfers of property regular on their face are to be treated as final unless there is a specific basis, justified in established law, to disturb and reverse them. Particularly when a recapture in “clawback” would ensnare unwitting recipients of past payment--those who transacted with the fraud's purveyor without knowledge of the wrongdoing--the need for definitive, principled, and limiting substantive rules is obvious.

Id. at *11 (footnote omitted). Yet, despite providing the parties with well-reasoned rulings on the statute of limitations issues, the court felt the need to reflect on the difficulty of fairly balancing the parties’ interests:

And yet there is that nagging point under it all: the money given to earlier recipients was likely mulcted from later-coming investors and lenders; so how “just” is it to allow earlier participants to keep the benefit of funds that had been “stolen” from others before they received them?

It is indeed nagging that statutes of limitations may unfairly protect earlier-investing net winners at the expense of later-investing net losers. It is also further nagging that the payments that these statutes allow net winners to keep are from funds stolen from net losers. It is, however, pretty rare to find a decision in a Ponzi scheme case that doesn’t leave you with a nagging feeling . . .

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, and more information about the book can be found at

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

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