Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or perform any legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.
Barclay v. Mackenzie (In re AFI Holding, Inc.)
9th Circuit Case No. 06-55033
April 16, 2008
In this opinion the 9th Circuit analyzed fraudulent transfers under § 548 of the Code (and its analogous provision in state law) in the form of payments paid out to "investors" in a Ponzi scheme. (A Ponzi scheme involves "paying investors purported interest payments with funds
raised from other investors, rather than from the profits of the . . . business".) The Court focused on the § 548(c) exception to fraudulent transfers for transferees who take "for value and in good faith," and particularly on the "reasonably equivalent value" that transferee received in his role as a limited partner of the debtor.
The Court's Holdings
1) On the transferee's argument that he was entitled to the "profits" not just the funds "invested", the Court held that no genuine issues of material fact existed as to whether the debtor, a corporation that had been operated by a person who was convicted of federal securities fraud for operating a Ponzi scheme, made the transfers at issue with the "actual intent to hinder, delay, or defraud" a creditor, because: a) " 'the mere existence of a Ponzi scheme' is sufficient to establish actual intent under § 548(a)(1) or a state’s equivalent to that section"; and b) debtor's principal's criminal plea agreement showed his fraudulent intent existed before defendant transferee "invested" in the debtor and before the transfers at issue, when debtor paid him back his "investment" along with the "profits."
2) On trustee's argument that the good faith exception to a fraudulent transfer claim under § 548(c) and its state law equivalent is barred as a matter of law, the Court held that the good faith exception is NOT barred because the transferee received in exchange for the transfers "reasonably equivalent value" in the form of "a proportionately reduced restitution claim" against the debtor. related to his role as a purported limited partner to the debtor.
Statutory Language
The Court pointed out that on one hand § 548 of the Code did not apply because the transfers at issue occurred well beyond its 1-year statute of limitations (extended to 2 years under BAPCPA), but "[w]here state statutes are similar to the Bankruptcy Code, cases analyzing the Bankruptcy Code provisions are persuasive. It then based virtually its entire analysis on 9th Circuit case law primarily interpreting § 548 of the Code.
§ 548(a)(1) and (c) state, as pertinent here:
The trustee may avoid any transfer . . . of an interest of the debtor in property . . . that was made . . within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily-- (A) made such transfer . . . with actual intent to hinder, delay, or defraud any entity to which the debtor was . . . indebted; or (B) received less than a reasonably equivalent value in exchange for such transfer ... .
c) . . . a transferee . . . of such a transfer . . . that takes for value and in good faith . . . may retain any interest transferred . . . to the extent that such transferee . . . gave value to the debtor in exchange for such transfer ... .Note that the Oregon and California's fraudulent transfer statutes pertinent to this decision are substantively identical, both based on the Uniform Fraudulent Transfer Act. So this opinion applies to Oregon no less than it does to California. Compare 11 U.S.C. § 548(a)(1) with Cal. Civ. Code § 3439.04(a) and ORS 95.230 (allowing a transfer to be avoided when the debtor acted with “actual intent to hinder, delay, or defraud” an entity or creditor, or where indicia of constructive fraud are present); and compare 11 U.S.C. § 548(c) with Cal. Civ. Code §3439.08(a) and ORS §95.270 (the safe harbor good faith exception to transferees who took in good faith and for value).
Actual Intent to Defraud
The transferee argued that there remained a genuine issue of fact on the debtor's actual intent to defraud any entity or creditors, and that therefore he should be entitled to go to trial on the transfer to him of "profits" not just the original "investment." The 9th Circuit disagreed, citing its own case law that fraudulent intent can be found from circumstantial evidence and that " 'the mere existence of a Ponzi scheme' is sufficient to establish actual intent under § 548(a)(1) or a state's equivalent to that section." The opinion pointed out that from the debtor's principal's admissions in his plea agreement, the Ponzi scheme was in effect at the time the transferee "invested" and continued to be throughout the time he received the payment, and that was sufficient to find actual fraudulent intent. So there was no genuine issue of material fact on this and so trustee prevailed as to the "profits," since the "reasonably equivalent value" exception about to be discussed only applied to the "investment" portion.
Existence of Reasonably Equivalent Value
The Court spent most of its analysis on this issue, primarily explaining two of its own precedents interpreting "reasonably equivalent value" in the Ponzi context and their application to the present case. In its own words:
in Agretech [Hayes v. Palm Seedlings Partners-A (In re Agric. Research and Tech. Group, Inc.), 916 F.2d 528 (9th Cir. 1990)], . . . we held that a distribution on account of a partnership interest relative to an investor’s capital contribution was not “reasonably equivalent value” as defined by the Bankruptcy Code and Hawaii’s analog. . . . [I]n United Energy [Wyle v. C.H. Rider & Family (In re United Energy Corp.), 944 F.2d 589 (9th Cir. 1991)], . . . we held that a transfer in exchange for a proportionally reduced restitution claim was “reasonably equivalent value” as defined by the Bankruptcy Code and California’s analog. . . . . The question before us today is whether the transfer from [the debtor to the transferee] was a distribution under Agretech, or a transfer in exchange for a proportionally reduced restitution claim under United Energy.The Court rejected the trustee's arguments that Agretech should control. 1) The fact "that Agretech dealt with affirmative defenses to actually fraudulent transfers [under § 548(a)(1)(A), as in the case here], whereas United Energy dealt with the prima facie case for constructively fraudulent transfers [§ 548(a)(1)(B)], was "a distinction without a difference." 2) "Although limited partnership interests are present in Agretech and in this case, [the transferee] was defrauded by [debtor's principal], creating rights different that the rights held by the limited partners in Agretech."
Instead the Court held that United Energy controls. Quoting the District Court opinion which it affirmed on this issue, the tranferee "exchanged his partnership interest for a proportionately reduced restitution claim." The 9th Circuit acknowledged that this exchange of payments for restitution claim did not occur expressly, but that, as in United Energy "we delve beyond the 'form' to the 'substance' of the transaction." Because debtor's business was a Ponzi scheme by the time transferee invested in it, the transferee"acquired a restitution claim at the time he bought into [the] ... Ponzi scheme, just as the investors in United Energy acquired a restitution claim at the time they bought [the debtor's fraudulently produced equipment]. It is this restitution claim, in toto, that [the transferee] exchanged when [debtor] returned [transferee's] principal 'investment' amount."
Ninth Circuit's Bottom Line
So the Court remanded to the bankruptcy court to determine if transferee took the transfers in good faith. If so, he will be entitled to retain the amount he initially "invested" in with debtor, because that would be covered by his restitution claim, now fully paid off with the debtor's transfers. But the "profits" would be beyond any restitution claim and so must be paid to the trustee.
by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com
Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.
© 2008 Bankruptcy Litigation Support for Attorneys
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