In October of this year, Sears Holdings Corp and affiliated Debtors filed a Chapter 11 case in the U.S. Bankruptcy Court for the Southern District of New York in a case pending before Judge Drain. Since that time, the company has been reducing its debt and its physical footprint by closing stores. After the bankruptcy
Second Circuit Finds Madoff Trustee can seek to Clawback Billions in Funds Transferred Abroad
Earlier this week, the U.S. Court of Appeals for the Second Circuit revived 88 fraudulent transfer cases that were consolidated on appeal. In those actions, the trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC sought to recover billions of dollars in funds transferred out of the U.S. to foreign investors, called feeder…
For the Defense: State Courts Reject the Ponzi Scheme Presumptions in Fraudulent Transfer Actions
Bruce J. Borrus writes:
Bernie Madoff in New York, Tom Petters in Minneapolis, Allen Stanford in Houston, and Darren Berg in Seattle lead a rogues’ gallery of infamous Ponzi schemers. All are now serving time in prison. But the civil litigation arising from their Ponzi schemes and the Ponzi schemes of other less notorious fraudsters is not over. Ponzi schemes have spawned thousands of fraudulent transfer cases. Anglo-American fraudulent transfer law has a long history dating back four centuries to the Statute of 13 Elizabeth, enacted in 1571, and to the first reported fraudulent transfer case, Twyne’s Case, decided in 1601. But fraudulent transfer law is far from settled. In recent years, especially in fraudulent transfer cases arising out of Ponzi schemes, the law developed rapidly in a direction favoring the plaintiffs. However, in 2015 and 2016, the direction began to turn.
In an effort to obtain funds for the victims of the Ponzi schemes, bankruptcy trustees and receivers have commenced fraudulent transfer cases to recover payments made by the Ponzi schemer. Many of the defendants had no knowledge of the Ponzi scheme. The defendants had innocently loaned money or provided goods and services. These defendants did nothing wrong. Nevertheless, most of the defendants lost—at least in federal courts.
The federal courts frequently apply Ponzi scheme presumptions that set high barriers for defendants. In 2015 and 2016, however, opinions issued by the highest courts of Minnesota and Texas rejected the Ponzi scheme presumptions. Before discussing these recent state court decisions, it is best to put the decisions into context—first by discussing Ponzi schemes and then by describing the federal courts’ Ponzi scheme presumptions.
There is no precise definition of a Ponzi scheme. The Ninth Circuit describes a Ponzi scheme as:
. . . a financial fraud that induces investment by promising extremely high, risk-free returns, usually in a short time period, from an allegedly legitimate business venture. The fraud consists of funneling proceeds from new investors to previous investors in the guise of profits from the alleged business venture, thereby cultivating the illusion that a legitimate profit-making business opportunity exists and inducing further investment.
Donell v. Kowell, 533 F.3d 762, 767 n.2 (9th Cir. 2008).
The Fifth Circuit describes a Ponzi scheme as:
. . . a pyramid scheme where earlier investors are paid from the investments of more recent investors, rather than from any underlying business concern, until the scheme ceases to attract new investors and the pyramid collapses.
Janvey v. Democratic Senatorial Campaign Comm., 712 F.3d 185, 188 n.1 (5th Cir. 2013).
In fraudulent transfer cases in which the transferor has been running a Ponzi scheme, many courts apply what have become known as Ponzi scheme presumptions. All of the reported decisions that have applied the Ponzi scheme presumptions are from federal courts. The cases typically originate as suits brought by bankruptcy trustees or receivers in cases in which the Ponzi schemer or one of his or her companies is the debtor. The bankruptcy trustee seeks a judgment in the amount that the Ponzi schemer paid to the defendant. Even though many fraudulent transfer cases are brought pursuant to a state’s version of the Uniform Fraudulent Transfer Act (“UFTA”), the federal courts that apply the Ponzi scheme presumptions cite as authority other federal cases. No state supreme court has yet applied the Ponzi scheme presumptions.
Continue Reading For the Defense: State Courts Reject the Ponzi Scheme Presumptions in Fraudulent Transfer Actions
For Fraudulent Transfer Statute of Limitations, Transfer of Real Property Occurred upon Recording of Deed, not Execution
A recently issued opinion by the U. S Bankruptcy Court for the District of New Mexico provides some guidance on the relevant date for the transfer of real property for purposes of the statute of limitations applicable to fraudulent transfer claims.
In Gonzales v. Sexton (In re Esquibel), Adv. No. 17-1042-j (Bankr. D.N.M. July…
Bankruptcy Court Extends Personal Jurisdiction to Foreign Online Customer in Fraudulent Transfer Litigation
David Doty writes:
The U.S. Bankruptcy Court for the Northern District of California recently held that a Hong Kong resident who had made online purchases of wine through a California retailer was subject to personal jurisdiction. See Kasolas v. Yau, Adv. Pr. No. 18-04012 (N.D. Cal. Bankr. May 11, 2018).
The defendant, a Hong…
PA Court Finds Funds Returned to Debtor After an Actual Fraudulent Transfer Not Recoverable
Recently, the U.S. Bankruptcy Court for the Eastern District of Pennsylvania clarified that funds returned to the debtor are not recoverable as intentional fraudulent transfers. See Holber v. Nikparvar (In re Incare, LLC), Adv. No. 14-0248 (Bankr. E.D.Pa. May 7, 2018).
The Debtor, Incare, LLC, was a medical care provider that provided services to…
The Safe Harbor Provision of the Bankruptcy Code Redefined
The United States Supreme Court recently issued a ruling in which it held that the Bankruptcy Code’s safe harbor provision § 546(e) does not prevent a trustee from clawing back transfers involving securities and financial institutions in circumstances when such institutions serve as mere pass-through entities for the transfer. The decision, Merit Management Group, LP …
Recovery in Fraudulent Transfer Litigation in Delaware Bankruptcy Court is Not Capped by the Amount of Creditor Claims
In PAH Litigation Trust v. Water Street Healthcare Partners, LP (In re Physiotherapy Holdings, Inc.), Case No. 13-12965 (KG), Adv. No. 15-51238 (KG), 2017 WL 5054308 (Bankr. D. Del. Nov. 1, 2017), the debtor entered into bankruptcy after a leveraged-buyout transaction (“LBO”). After a plan was confirmed, a resulting litigation trust brought actual and constructive…
Trustee Retains Right to Jury in Fraudulent Transfer Actions Even If Waived by Debtor Before Bankruptcy
The Bankruptcy Court for the Southern District of Florida recently held that a chapter 7 trustee is not bound by a debtor’s pre-bankruptcy waiver of its jury rights for fraudulent transfer claims brought by the trustee under Section 548 of the Bankruptcy Code. In Bakst v. Bank Leumi, USA (In re DIT, Inc.), 575…