Receivers handling Ponzi schemes and fraud cases are
familiar with the concept of suing the “winners” in the scheme to recover
transfers made to them in excess of their investment. Such suits are based
on the theory that the excess payments are fraudulent transfers. Indeed,
it is generally accepted that where a Ponzi scheme is involved, no value
is given for the excess payments received by investors. Donell v.
Kowell, 533 F.3d 762 (9th Cir. 2008).
Cases are split on whether parties that aided the
fraud, such as brokers or sales people, can be held liable for payments
they received. A number of cases hold that these parties can be held
liable, reasoning that all transfers made from a Ponzi scheme are
fraudulent transfers, because the operator of the scheme knows that later
investors will not be paid and, therefore, has the actual intent to
hinder, delay or defraud them. These cases hold that the defense to a
fraudulent transfer claim - that the recipient of the transfer acted in
“good faith” and gave “reasonably equivalent value” for the transfers - is
lacking when someone is paid for aiding a scheme. This is because, even if
they did not know about the fraud, they did not give anything of value for
the payment they received. The entity involved, or its creditors, did not
receive anything of value by encouraging more investors to invest; in fact
the entity only became more in debt. See e.g., Warfield v. Byron,
436 F.3d 551 (5th Cir. 2006); In re Randy, 189 B.R. 425 (Bankr. N. D. Ill.
1995).
These cases judge value by what the entity in
receivership or the investors received for the payment made, rather than
what the recipient of the payment gave. Cases going the other way look at
what the recipient gave and whether that was of value. For example,
services rendered to pitch the scheme might be deemed consideration that
is sufficient to protect the transfer. See e.g., In re Churchhill Mortg.
Inv. Corp., 256 B.R. 664 (Bankr. S.D.N.Y. 2000). These cases warn that
if that is not the case, even innocent trade creditors - the landlord or
the pizza delivery man - might be found liable for payments made to them.
The Fifth Circuit, in a new case arising out of
the Allen Stanford Ponzi scheme, found The Golf Channel liable to
return nearly $6 million dollars paid to it for advertising services it
provided that aided the scheme. Janvey v. The Golf Channel, F.3d, 2015 WL
1058022 (5th Cir. Mar. 11, 2015). That court found that the advertising
did not provide reasonably equivalent value from the standpoint of the
Stanford creditors.
The court started its analysis by stating that
fraudulent transfer laws “were enacted to protect creditors against
depletion of the debtor’s estate” and allow creditors to void fraudulent
transfers and force the transferee to return the transfer. Id. at *2.
A transfer is fraudulent if it is made “with actual intent to hinder,
delay or defraud any creditor of the debtor.” California Civil Code §
3439.04(a)(1). Most circuits have held that a Ponzi scheme establishes
fraudulent intent in making the transfers (often called the “Ponzi
presumption”) because the transferor knows he or she is defrauding the
investors. Donell, supra.; Warfield, supra.
A transferee has a defense if it can establish two
elements: (1) that it took the transfer in ‘good faith’; and (2) that in
return for the transfer it gave the debtor “reasonably equivalent value.”
California Civil Code § 3439.08(a). While the receiver did not challenge
whether The Golf Channel took the payments it received in good faith, the
court held, as a matter of law, that the advertising was of no value
viewed from the standpoint of the creditors. It cited comments to the
Uniform Fraudulent Transfer Act that the definition of value was modeled
after the bankruptcy code and that “the purpose of the act [is] to protect
a debtor’s estate from being depleted to the prejudice of the debtor’s
creditors. Consideration having no utility from a creditor’s standpoint
does not satisfy the statutory definition.” Id. at *3 (emphasis in
original). Based on that definition and a number of cases the court cited,
the court held, “we measure of value ‘from the standpoint of the
creditors,’ and not from that a buyer in the marketplace.” Id. at *4.
The court also cited: (1) Warfield, supra., where it held that
commissions paid to a broker for securing new investors in a Ponzi scheme
were voidable, even if the broker was unaware of the fraud; and (2)
Donell, supra. “that interest payments made to investors in a Ponzi
scheme ‘are merely used to keep the fraud going by giving the false
impression that the scheme is a profitable, legitimate business’ and do
not compensate for the time value of money.” The Golf Channel at *5
fn.6.
The Golf Channel argued that it was an innocent
trade creditor simply promoting a business brand and it should be treated
differently from a broker who tries to secure new investments in the
scheme. The Court rejected this plea, stating that the law makes no
distinction between different types of services or transferees and that
there is no authority to create an exception for “trade creditors.” Id.
at*5.
Some commentators have complained that the case
goes too far and lament that, should every business have to do a financial
prostate exam of every customer who happens to be a money manager? Unless
the Supreme Court grants review, it appears to be a hole-in-one for the
receiver. Indeed, news reports state that the Stanford receiver has claims
against seven other sports marketing deals involving $36 million dollars –
which had been stayed pending The Golf Channel decision.
*Peter A. Davidson is a Partner of Ervin Cohen & Jessup LLP a
Beverly Hills Law Firm. His practice includes representing Receivers and
acting as a Receiver in State and Federal Court.
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