Thursday, October 27, 2011

Eleventh Circuit Addresses "For Value" Defense In Ponzi Scheme Fraudulent Transfer Case

In Perkins v. Haines (10-10683), the Eleventh Circuit released a published opinion addressing an issue of first impression in this Circuit. The question addressed is whether "transfers to the investors prior to the collapse of the Ponzi scheme were “fraudulent transfers” under 11 U.S.C. § 548(a)(1)(A)" or whether the transfers were "for value." The court concluded the transfers were "for value" and affirmed the bankruptcy court's holding. Notably, the Securities and Exchange Commission filed an amicus brief in support of the prevailing appellees. Judge Wm. Terrell Hodges, Judge for the Middle District of Florida sitting by designation, wrote the opinion for the court and was joined by Judge Edmondson and Judge Martin. The opinion began:
International Management Associates, LLC, and several related entities (the “Debtors”) were operated as the instruments of a Ponzi scheme. A receiver ultimately filed voluntary petitions in the bankruptcy court seeking relief for each of the Debtors under Chapter 11 of the Bankruptcy Code. A consolidated plan of liquidation was approved and William F. Perkins was appointed as Plan Trustee. The Trustee then instituted a number of adversary proceedings in the bankruptcy court seeking to avoid and to recover distributions that had been made to the investors in the Debtors. The Trustee claimed that transfers to the investors prior to the collapse of the Ponzi scheme were “fraudulent transfers” under 11 U.S.C. § 548(a)(1)(A) and applicable state law. The investors asserted an affirmative defense under 11 U.S.C. § 548(c), claiming that the transfers were “for value.” The Trustee moved for partial summary judgment. The bankruptcy court denied the motion, effectively upholding the availability of the investors’ affirmative defense. The Trustee filed this appeal. It presents an issue of first impression in this Circuit. We affirm.
The court analyzed the law as follows:
With respect to Ponzi schemes, transfers made in furtherance of the scheme are presumed to have been made with the intent to defraud for purposes of recovering the payments under §§ 548(a) and 544(b). See In re AFI Holding, Inc., 525 F.3d 700, 704 (9th Cir. 2008).....For purposes of this appeal, as in the bankruptcy court, it is presumed that all of the Debtors’ transfers to the investor defendants qualify as fraudulent transfers under § 548(a)(1)(A) and applicable state law.
However, § 548(c) provides a transferee with an affirmative defense where the transferee acts in good faith and “[gives] value to the debtor in exchange for such transfer . . . .” The term “value” is defined to include “satisfaction or securing of a present or antecedent debt of the debtor.”.....In the case of Ponzi schemes, the general rule is that a defrauded investor gives “value” to the Debtor in exchange for a return of the principal amount of the investment, but not as to any payments in excess of principal. 
The Trustee hangs his hat on a line of cases holding that transfers to redeem an equity investment in an insolvent entity (initially made free of fraud) cannot constitute a transfer “for value.”.....The Trustee contends that these decisions should apply here because the Debtors were all insolvent at the time the transfers to the investor defendants were made, and any such transfers served only to redeem their worthless equity interests. We disagree, and find the argument to be unpersuasive for the simple reason that none of these decisions involved Ponzi schemes. Stated differently, none of the stockholders in those cases were fraudulently induced into making their initial investments so that none possessed fraud claims that would be satisfied in whole or in part by virtue of the later transfers. Each case involved a situation in which an insolvent corporation attempted to pay off its shareholders at the expense of creditors, without receiving any value in return and with no regard for satisfying any possible antecedent debts.

The court affirmed the bankruptcy court's order and concluded:

The Trustee agrees that the investor defendants purchased limited partnerships from the Debtors at a time when the Ponzi scheme was already in operation and a claim for fraud or restitution was created in favor of the investors based on the Debtors’ fraudulent activity. Under AFI Holding and the general rule, later transfers from the Debtors up to the amount of the investment satisfied the investor defendants’ restitution or fraud claims and provided value to the Debtors. The bankruptcy court’s denial of the Trustee’s motion for partial summary judgment is AFFIRMED.
The bankruptcy court's order, the briefs filed in the case and the Eleventh Circuit's opinion can be viewed at the links below:


Post a Comment