Eleventh Circuit Decides Important Ponzi Scheme Issues

Eleventh Circuit Decides Important Ponzi Scheme Issues

 The Eleventh Circuit issued an opinion this week that has to make receivers happy. See Wiand v. Lee, 2014 U.S. App. LEXIS 10154 (11th Cir. Jun. 2, 2014) [an enhanced version of this opinion is available to lexis.com subscribers]. Fraudulent transfer claims are most often the bread and butter of a receivership estate in a Ponzi scheme case. But two hurdles often encountered by receivers in the “clawback” battles are:

1. Does the receiver have standing to bring fraudulent transfer claims?

2. Can the receiver recover prejudgment interest if successful on those claims?

The Eleventh Circuit has now addressed both questions.


On the standing issue, there has been considerable debate as to whether a receiver is even the proper party to bring fraudulent transfer lawsuits, because the receiver’s claim must be on behalf of the receivership entity and not merely seeking redress for generalized harm to all creditors. Courts have been engaging in varied analyses to reach their decisions on this question.

Some confusion stems from two circuit court decisions that called into question a receiver’s standing to bring fraudulent transfer claims. In Eberhard v. Marcu, 530 F.3d 122, 132-34 (2d Cir. 2008) [enhanced version], the Second Circuit drew a distinction where the receiver is receiver over a an individual rather than a corporation, finding that when the receiver is appointed to represent the estate of an individual (rather than an entity), the receiver lacks standing to bring fraudulent transfer claims because outside of the receivership and only creditors of the individual can bring such a claim. See also Troelstrup v. Index Futures Group, Inc., 130 F.3d 1274 (7th Cir. 1997) [enhanced version].

Since those decisions, the Fifth Circuit found that the receiver of Stanford Financial, an entity, does not have standing to bring fraudulent transfer claims if those claims are brought on behalf of creditors. Janvey v. Alguire, 539 Fed. App’x 478 (5th Cir. Aug. 30, 2013) [enhanced version]. In a previous decision, Janvey v. Democratic Senatorial Campaign Committee, Inc., 712 F.3d 185 (5th Cir. 2013) [enhanced version], the Fifth Circuit had considered the issue of receiver standing in facts also arising out of the Stanford Ponzi scheme. In that case, the Fifth Circuit held that “a federal equity receiver has standing to assert only the claims of the entities in receivership.” Interestingly, the Fifth Circuit issued that substitute opinion to replace Janvey v. Democratic Senatorial Campaign Comm., Inc. (DSCC I), 699 F.3d 848, 853 (5th Cir. 2012) [enhanced version], to “confront and correct errors of law pertaining to standing and imputed knowledge” that were contained in its original opinion.  The Stanford receiver has filed a petition for writ of certiorari to the Supreme Court asking for resolution on the question of whether a receiver has standing to assert claims on behalf of the receivership’s creditors.

This new decision from the Eleventh Circuit in Wiand v. Lee, arising out of the Arthur Nadel Ponzi scheme, goes a long way to clear up the confusion. In citing and relying upon Judge Posner’s often cited decision in Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995) [enhanced version], the Eleventh Circuit explained:

A receiver of entities used to perpetrate a Ponzi scheme does not have standing to sue on behalf of the defrauded investors but does have standing to sue on behalf of the corporations that were injured by the Ponzi scheme operator. Although the corporations constitute the "robotic tools" used by the Ponzi operator, they are "nevertheless in the eyes of the law separate legal entities with rights and duties." The money they receive from investors should be used for their stated purpose of investing in securities, and thus the corporations are harmed when assets are transferred for an unauthorized purpose to the detriment of the defrauded investors, who are tort creditors of the corporations. Although the corporations participate in the fraudulent transfers, once the Ponzi schemer is removed and the receiver is appointed, the receivership entities are no more the "evil zombies" of the Ponzi operator but are "[f]reed from his spell" and become entitled to the return of the money diverted for unauthorized purposes.

Under Lehmann, the Receiver has standing to sue on behalf of the receivership entities because they were harmed by Nadel when he transferred profits to investors, such as the Lee Defendants, from the principal investments of others for the unauthorized purpose of continuing the Ponzi scheme. Although the receivership entities were the instruments of Nadel's fraud, they were distinct legal entities whose purpose was to use client funds to invest in securities, and they were harmed when Nadel diverted the funds for unauthorized uses. Applying Lehmann to FUFTA, the receivership entities became "creditors" of Nadel at the time he made the transfers of profits to Lee and others because, as FUFTA requires, they had a "claim" against Nadel. They had a "claim" against Nadel because he harmed the corporations by transferring assets rightfully belonging to the corporations and their investors in breach of his fiduciary duties, and a "claim" under FUFTA includes "any right to payment" including a contingent, legal, or equitable right to payment. Fla. Stat. § 726.102(3). See also Cook v. Pompano Shopper, Inc., 582 So. 2d 37, 40 (Fla. 4th DCA 1991) ("A tort claimant or contingent claimant is as fully protected under the Uniform Fraudulent Transfer Act as a holder of an absolute claim.") [enhanced version]. The receivership entities were thus creditors because they had a right to a return of the funds Nadel transferred for unauthorized purposes for the benefit of their innocent investors. See Lehmann, 56 F.3d at 754. The Receiver's claim thus fits within the statutory language of FUFTA, which requires the existence of a creditor and a debtor. Wiand v. Lee, 2014 U.S. App. LEXIS 10154, at *16 - 19 (citations and footnote omitted).

This is about as good of an explanation as receivers may ever get on the standing issue and helps reconcile the distinctions being drawn by courts on whether the debtor is an individual or an entity that has been defrauded by its principals.

Prejudgment Interest

Wiand v. Lee also contains a good discussion on the question of whether a receiver should be awarded prejudgment interest on a fraudulent transfer claim. The receiver sought $437,734 in prejudgment interest by applying Florida’s statutory interest from the time of the transfers. The magistrate had recommended that the receiver be denied prejudgment interest “on equitable grounds,” but the Eleventh Circuit disagreed. The court noted that “Florida endorses the ‘loss theory’ of prejudgment interest according to which prejudgment interests is ‘merely another element of pecuniary damages.’” Although an award of prejudgment interest may be subject to equitable factors, the court found that the lower court had abused its discretion in not considering the governing equitable factors. Instead, the lower court had concluded that, “allowing recovery of prejudgment interest against the Lee Defendants would be inequitable because they invested in the Hedge Funds assuming their legitimacy, paying prejudgment interest would result in an award greater than the amount of their profits, and because ‘the Lee Defendants have suffered enough.’"

So now we know that “Defendants have suffered enough” is not good enough to disallow prejudgment interest. The Eleventh Circuit remanded for further consideration on this issue.

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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