Over the past few years, we’ve watched as courts have expanded and retracted the use of the Ponzi scheme presumption. One of the broader expansions of the presumption resulted from a decision in the Thomas Petters Ponzi scheme in Stoebner v. Ritchie Capital Management, L.L.C. (In re Polaroid Corp.), 472 B.R. 22 (Bankr. D. Minn. 2012) [an enhanced version of this opinion is available to lexis.com subscribers]. An analysis of that decision was reported in this blog in “Is the “Ponzi Scheme Presumption” Expanding into New Territory?”
That decision was recently upheld on appeal to the district court. The appellate court affirmed that the Ponzi scheme presumption can be applied to find fraudulent intent by attributing the requisite intent to a controlling entity. Ritchie Capital Management, L.L.C. v. Stoebner. The district court quoted extensively from the bankruptcy court opinion and relied upon the following facts, among others, in agreeing with the bankruptcy court that the Ponzi scheme presumption applied to avoid the lien that Polaroid granted to Ritchie Capital Management. Here are some statements that the district court made:
On the issue of common control, the district court concluded:
Thus, while it is true that Polaroid was not operating a Ponzi scheme, Polaroid was purchased with the proceeds of the scheme, and was controlled, for all practical purposes, by the purveyor of the scheme. Its financial fate was inextricably linked to that scheme.
On the issue of intent, the district court stated:
[W]hen Petters raided Polaroid by pledging its trademark assets – assets that should have been available for Polaroid’s own financing needs, and ultimately, for its creditors – Petters either intended to render those assets unavailable to Polaroid, or at the very least, “should have seen this result as a natural consequence of [his] actions.”
On the issue of whether the transfer was “in furtherance” of the Ponzi scheme, the court noted:
[A]s the architect and chief perpetrator of the Ponzi scheme, and the owner of PGW, Petters’ motivations – whether based on fears of personal financial ruin or criminal liability, or concern for PGW specifically, or all three – such motivations are indistinguishable from Petters’ motivation in perpetuating the operation of the Ponzi scheme. Petters’ personal interests were entirely intertwined with the Ponzi scheme and the scheme’s continuation.
In conclusion, the court stated:
For all of the foregoing reasons, given this particular factual context, the Court finds that the Ponzi scheme presumption applies to the facts presented here to satisfy the requirement of actual fraudulent intent under both federal and state law. There can be no dispute that Tom Petters operated a massive Ponzi scheme. Through his control of Polaroid, he looted Polaroids’ assets in order to appease the Ritchie Entities, whose loan money had gone not to Polaroid, but to pay off other investors. Petters effected the transfer in a desperate attempt to keep his Ponzi scheme afloat in its waning days. Appellants’ appeal regarding the application of the Ponzi scheme presumption is therefore denied.
It remains to be seen if this decision will stick. The defendants have appealed to the Eighth Circuit.
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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