Rejecting the reasoning of a number of opinions by federal courts, the Minnesota Supreme Court has held that the “Ponzi Scheme Presumption” does not apply to claims brought under the Minnesota Uniform Fraudulent Transfer Act (“MUFTA”). Patrick Finn and Lighthouse Management Group, Inc. v. Alliance Bank et al, 2015 WL 672406 (Minn. 2015). The case involved the fraudulent lending operations of First United Funding, which was placed into receivership. First United operated a Ponzi scheme, but also ran other legitimate business operations. The receiver brought actions against Alliance Bank and others seeking to recover funds under the MUFTA. The receiver argued that the “Ponzi Scheme Presumption” entitled him to a judgment on the following key elements of his claims: (1) the transfers in question were made with actual intent to hinder, delay or defraud any creditor of First United, (2) First United was insolvent on the dates of the transfers in question and (3) the recipients of the transfers did not provide reasonably equivalent value in exchange for the transfers. The Minnesota Supreme Court rejected the presumption in all three instances.
The court began its analysis by noting that the “Ponzi-scheme presumption, by operation of its three components, allows a creditor to bypass the proof requirements of a fraudulent-transfer claim by showing that the debtor operated a Ponzi scheme and transferred assets ‘in furtherance of the scheme.’” However, the court then stated that the statute “neither mentions nor defines a ‘Ponzi scheme.’” In reviewing the statute, the court noted that it contains no provision allowing a court to make any presumptions based on the existence of a Ponzi scheme. The court interpreted the statute as one which deals with transfers on a transfer-by-transfer basis and not the structure of the entity making the transfer in question. Next, the court noted the statute contains a list of “badges of fraud” which a court may rely on to determine if the debtor transferred assets with the intent to hinder, delay or defraud any creditor, and that the operation of Ponzi scheme is not one of those badges. The court stated: “[T]he Legislature’s enumeration of a specific list of badges of fraud, none of which are conclusive, precludes an interpretation that it intended a non-enumerated badge of fraud to be conclusive.” (emphasis in original). As a result, the court concluded that, while the existence of a Ponzi scheme may allow the court to draw a rational inference that a transfer was made with fraudulent intent, the existence of such a scheme does not relieve the creditor from his burden of proof under the statute.
The court also rejected the notion that a Ponzi scheme presumption conclusively establishes that a debtor was insolvent on the date the transfer was made. Again, the court noted that the statute does not define insolvency with a view to whether the debtor was operating a Ponzi scheme. Instead, the court noted the statute provides that “a debtor is insolvent if the sum of the debtor’s debts is greater than all of the debtor’s assets, at a fair valuation.” In addition, the court noted that the statue does contain a presumption on insolvency if the debtor is not generally paying debts as they become due. Adding a presumption of insolvency based on the existence of a Ponzi scheme would, in the court’s words, require it to “add language to MUFTA, something we cannot do.” Further, since some perpetrators of Ponzi schemes also run legitimate businesses, and since some Ponzi schemes start out as legitimate businesses and only degenerate into a Ponzi scheme at a later point in time, the court concluded that a conclusive presumption of insolvency when a debtor operates a Ponzi scheme “may be incorrect, both as a matter of law and as a matter of fact.”
The court finally rejected the third component of the Ponzi scheme presumption – that the recipient can never give reasonably equivalent value in exchange for the transfer. The court noted that the lack of reasonably equivalent value is an element of proof in a claim for constructive fraudulent transfers, and the existence of reasonably equivalent value is an element of proof in a defense to a claim for actual fraudulent transfers. Again, the court noted the statute delineated several specific types of reasonably equivalent value – non-collusive foreclosure sales, the execution of a power of sale for the disposition of property on default under a mortgage, deed of trust or security agreement and the satisfaction or securing of an antecedent debt – and that the existence of a Ponzi scheme was not included by the legislature in the statute. The court also rejected some of the “fairness” and “policy” arguments advanced by the receiver to justify the presumption. First, the court rejected the policy argument that all contracts between a Ponzi scheme perpetrator and his victims are unenforceable as a matter of public policy. The court rejected this argument because not every Ponzi scheme – First United’s included – lacks a legitimate source of earnings. In this instance, while no one argued that First United did not operate a Ponzi scheme, it was also clear that it had legitimate business operations and that the defendants had purchased non-oversold participation interest in actual loans to real borrowers, which provided First United with a legitimate source of earnings from which it could pay the banks which purchased these interests. Second, the court rejected the policy argument that the Ponzi scheme presumption operates to the beneficial purpose of treating all creditors equally. The court noted the absence of language in the statute setting out equality of treatment as a goal, and held that the statute does not prevent a debtor from making a preferential transfer in favor of one bona fide creditor over another so long as the transfer is not fraudulent.