Posted by Kathy Bazoian Phelps
The unique circumstances of Ponzi schemes require careful consideration to mete out justice in unwinding them and in redressing the injuries to defrauded victims. Investors who got out early were often paid back in full, plus some. Other investors who invested later may have received little to nothing. Fraudulent transfer law is used to seek recovery of money paid out to investors, whether earlier or later. Many questions unique to Ponzi scheme cases must be evaluated in the process of trying to do equity. For example:
- How should courts balance the interests of earlier versus later investors?
- Should net winners and net losers be treated differently?
- How far back can the trustee look in seeking to recover money paid to investors?
- How should courts apply good faith criteria to Ponzi scheme victims asserting a good faith value defense to fraudulent transfer claims, where they relied and trusted family and friends in a typical affinity scheme?
The court noted that the Minnesota Uniform Fraudulent Transfer Act does not contain its own statute of limitations, and that perhaps Minnesota was the only state that removed the statute of limitations provision from its version of the Uniform Fraudulent Transfer Act. The court considered two competing interpretations of the statute of limitations: (1) six year limitation period "upon a liability created by statute"; or (2) six years with a possible extension because "the cause of action shall not be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud." The difference is that the latter interpretation would permit the trustee to reach back for an extended period of time because of the "discovery allowance" period.
The court also considered how to coordinate the statute of limitations restrictions of Bankruptcy Code § 546(a) with the state law statute of limitations. The defendants argued that the two limitations periods of § 546(a) ran at the same time so that the six year state limitations period ran backwards from the date that avoidance action was commenced. The trustee argued that the state statute of limitations was tolled from the entry of the order for relief until the avoidance action was commenced, so the limitations period would run backwards from the date of the order for relief.
Finally, the court also considered the trustee’s request to reach back further based on non-statutory tolling doctrines.
Here are the court’s conclusions on the statute of limitations questions:
Ruling #1: "The Trustee’s avoidance claims under MUFTA are subject to a six-year limitations period. However, the discovery allowance of Subd. 1(6) may operate to extend the scope of transfers subject to avoidance to those made before that six-year period, if the Trustee proves the factual basis for it."
Ruling #2: "As long as the Trustee commenced any individual action in this avoidance docket by the deadline under § 546(a)(1), his avoidance power can reach, at minimum, transfers that took place within the full length of the six-year base limitations period under Subd. 1(6), dating back from the date of the subject Debtor’s bankruptcy filing."
Ruling #3A: "The extension of avoidance at the Trustee’s instance under color of the discovery allowance of Subd. 1(6) to any transfer that took place earlier than the six-year base period of that subdivision will turn on whether the predicate creditor for a particular adversary proceeding had discovered the facts constituting the fraud of the Petters Ponzi scheme, as they applied to such a transfer."
Ruling #3B: "The discovery allowance of Subd. 1(6) is the only basis on which the Trustee may obtain an easing or extension of that six-year period. The doctrines of fraudulent concealment, equitable tolling, and adverse domination are not available to him as bases for tolling as a matter of law, or they do not lie on their merits on the configuration of parties in the Trustee’s litigation."
These rulings set the boundaries in the Petters case for how far back the trustee can reach to "recapture ill-gotten gains." The court sought not to subjectively determine "fairness," but to respect existing law: