Tag Archives: creditor

April 28, 2015

Minnesota Supreme Court Rejects the “Ponzi Scheme Presumption” in Connection with the Uniform Fraudulent Transfer Act

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.

February 4, 2014

Tenth Circuit BAP Clarifies Creditors’ Rights to File Plans in Small Business Chapter 11 Cases

Section 1121(e)(1) of the Bankruptcy Code provides a 180-day exclusive period for a small business debtor to file a plan, unless this period is extended by the court.  Section 1121(e)(2) provides “the” plan and a disclosure statement (if any) shall be filed no later than 300 days after the order for relief.  Section 1121(e)(3) provides that the deadlines in 1121(e)(1) and (e)(2) may be extended only if the debtor demonstrates that it is more likely than not that the court will confirm a plan within a reasonable period of time. These time periods in section 1121(e), and any extension of them, differ from the times periods in sections 1121(b) and (c) and the procedure in section 1121(d) for extending them. 

In the context of a small business chapter 11 case, then, is a creditor prohibited from filing a plan more than 300 days following the order for relief (the deadline contained in sec. 1121(e)), or may the creditor still file a plan if it otherwise meets the provisions of section 1121(c)?  In ruling that the provisions of section 1121(e) apply only to small business debtors, the Tenth Circuit BAP held that creditors of a small business debtor may file plans of reorganization more than 300 days following the order for relief.  Thurner Industries, Inc. v. Gunnison Energy Corporation (In re Riviera Drilling & Exploration Company), 2013 WL 6623647 (10th Cir. BAP 2013). 

In Riviera Drilling the debtor filed a plan but was unsuccessful in obtaining confirmation.  The bankruptcy court then ordered the appointment of a chapter 11 trustee, who unsuccessfully sought to sell the debtor’s assets through a section 363 sale.  When the trustee thereafter sought to have the case converted to a chapter 7 proceeding.  Gunnison Energy, a creditor of the estate, opposed the trustee’s motion to convert and filed a liquidating plan.  Thurner Industries objected to confirmation of Gunnison Energy’s plan in part on the ground that it was filed after the 300-day deadline of section 1121(e)(2), and the 300-day deadline had not been extended.  The bankruptcy court concluded that the 300-day deadline applies only to plans filed by a debtor and confirmed the plan.  The Bankruptcy Appellate Panel affirmed that ruling.

The BAP held that the provisions of section 1121 should be read as a whole in determining the extent of section 1121(e)’s reach.  First, the court noted that section 1121(b) provides a 120-day exclusive period for a debtor to file a plan and, if the debtor does so, section 1121(c) extends this exclusive period an additional 60 days to enable the debtor to obtain confirmation of its plan.  If the debtor fails to meet these deadlines, or if a chapter 11 trustee is appointed, the debtor’s exclusive period ends, and creditors may file plans.  These deadlines may be extended in some respects by means of a request under section 1121(d) filed by a party in interest.  However, if the debtor is a small business, the deadlines in sections 1121(b) and (c) a replaced by section 1121(e)(1) and (2), and the procedure for extending the small business deadlines is found in sections 1121(e)(1)(A) and (B) and section 1121(e)(3).  Importantly, the court noted that in the small business context, extension of the 180-day and 300-day deadlines depends on affirmative action by the debtor with no right by creditors or other parties in interest to seek an extension. 

In addition, the BAP looked to changes made to section 1121(e) in the 2005 BAPCPA amendments.  Previously, the deadline for filing a plan could be requested by a party in interest, whereas the amendments removed this language and placed complete power to seek an extension in the debtor.  In addition, the prior section 1121 required “all plans” to be filed within 160 days from the order for relief, whereas the amendment speak in terms of “the” plan must be filed within 300 days from the order for relief.

The BAP then reviewed other court decisions dealing with section 1121(e) and the effect of its deadlines on untimely filed plans.  All but one reported decision dealt with plans filed only by the debtor.  One, the decision of the Bankruptcy Court for the Southern District of Florida in In re Florida Coastal Airlines, Inc., 361 B.R. 286 (Bankr. S.D. Fla. 2007), involved competing plans by the debtor and a creditor, with the debtor’s plan being timely filed and the creditor’s plan falling outside the 300-day deadline.  The court in Florida Coastal Airlines determined that, since only the debtor may file “a” plan until the exclusive period expires, and since “the” plan must be filed not later than 300 days after the order for relief, the phrase “the plan” in section (e)(2) referred only to “a plan” filed by the debtor. 361 B.R. at 291.  In addition, because extension of the section 1121(e) deadlines can be accomplished only through the affirmative action of the debtor, the Florida Coastal Airlines court found it absurd to bind creditors to a deadline that only the debtor could seek to extend. 

The Tenth Circuit BAP found the reasoning of the Florida Coastal Airlines case persuasive.  The BAP agreed that applying the 300-day deadline of section 1121(e) to defeat a result that may otherwise be beneficial to creditors made no sense, and that it is absurd to hold creditors to the 300-day deadline when only the debtor may seek its extension.  Reading section 1121(e) in harmony with the rest of section 1121 lead the court to conclude that the deadlines contained in section 1121(e) apply only to the small business debtor, and the deadlines contained in sections 1121(c) apply to creditors and parties in interest, even in small business cases.

April 4, 2011

Creditor – Debtor State Exemption Chart For Rocky Mountain States

Certain property of a debtor may be exempt from execution by a creditor/lender under state law or bankruptcy law. Before determining whether to pursue a debtor’s assets, a creditor or lender should be knowledgeable of the type and how much of a debtor’s assets cannot be executed upon by the creditor/lender. The following table serves as a starting place for research on the type and amount of assets that are exempt from execution in certain states and districts where Holland & Hart is officed. This chart is current as of February 14, 2011 and is not a substitute for advice and counsel from a Holland & Hart attorney, who can help you strategize on how a creditor can optimally recover on a defaulted loan.

Download the Exemptions Chart