Q: I am a receiver in a Ponzi scheme case. While I know I can sue
to recover excess payments made to investors in the scheme, the false
profit they were paid, per Donell v. Kowell, 533 F3d 762 (9th Cir.
2008), in my case large sums were paid as referral or broker fees to get
investors to invest. Are those payments recoverable in the Ninth Circuit?
A: Yes. While there has been split in cases across the county on
the issue, the majority view has been such payments are fraudulent
transfers, because no “value” is given for the services rendered. Compare,
Warfield v. Byron, 436 F3d 551, 560 (5th Cir. 2006) (“It takes
cheek to contend that in exchange for payments he received, the Ponzi
scheme benefitted from his efforts to extend the fraud by securing new
investments.”); In re Randy, 189 B.R. 425, 441 (Bankr. N.D. Ill.
1995) (“The services conferred no value …); In re Rodriguez, 209
B.R. 424 (Bankr S.D. Tex. 1997); with In re Churchill Mortgage
Investment Corp., 206 B.R. 664 (Bankr. S.D.N.Y. 2001); In re Fin
Federated Title & Trust, Inc., 309 F3d 125 (11th Cir. 2002) (No per se
rule that services furthering Ponzi scheme are without value).
The divergent view is based on how “value” is measured. As explained by
the Fifth Circuit in Janvey v. Golf Channel, Inc., 834 3d 570 (5th
Cir. 2016), the Bankruptcy Code, and arguably the Uniform Fraudulent
Transfer Act, which was modeled after the Code, measures value from the
standpoint of creditors, not from that of a buyer in the marketplace.
Because soliciting investors in a Ponzi scheme harms creditors, the
services are of no value. Other courts and some statutes, such as Texas’
fraudulent transfer statute [Texas Business & Commerce Code §24.004(a)]
measure value by the worth of the services in the marketplace. As the
Texas statute states what: “the transferor would have sold the assets in
an arm’s length transaction”.
Up to now, the Ninth Circuit had not ruled on this issue. However, in a
memorandum decision issued in December 2018, Hoffman v. Markowitz,
2018 WL 6735199 (9th Cir. 2018), the Ninth Circuit, without announcing a
per se rule, sided with the cases following Warfield v. Byron, supra.
holding they were better reasoned. It found, in the case before it, that
because the only service the defendant provided was to refer others to the
Ponzi scheme, he did not provide “reasonably equivalent value” for the
referral fees he received.
Judge Nelson, concurring, would have gone further and held: “the
payments are per se voidable because investor referrals do not provide
value to the Ponzi scheme. Rather, each referral increases the Ponzi
scheme’s liabilities and its inevitable insolvency”. She argued her view
was not only consistent with California’s Uniform Voidable Transaction Act
but also California Supreme Court authority that value is to be measured
from the stand point of creditors, not debtors. Hansen v. Cramer,
39 Cal. 2d 321, 324 (1952).
*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.