Kathy Bazoian Phelps
Senior Counsel in Ponzi Scheme Litigation
and Bankruptcy Matters

Kathy is a senior business trial attorney with more than 25 years experience prosecuting and defending claims for clients involved in Ponzi scheme matters and in bankruptcy proceedings. Kathy’s practice includes recovering assets for clients in complex fraud cases on under standard fee and alternative fee arrangements. Kathy also serves as a mediator in bankruptcy matters, in complex business disputes, and in matters requiring an expert on fraud or Ponzi schemes.

Kathy’s Clients in Ponzi Scheme Cases and Bankruptcy Matters
Equity Receivers
Bankruptcy Trustees
High Net Worth Investors
Debtors in Bankruptcy
Secured and Unsecured Creditors

Monday, February 10, 2014

Expanded Scope of Ponzi Scheme Presumption Upheld on Appeal

Posted by Kathy Bazoian Phelps

   Over the past few years, we’ve watched as courts have expanded and retracted the use of the Ponzi scheme presumption. One of the broader expansions of the presumption resulted from a decision in the Thomas Petters Ponzi scheme in Stoebner v. Ritchie Capital Management, L.L.C. (In re Polaroid Corp.), 472 B.R. 22 (Bankr. D. Minn. 2012). An analysis of that decision was reported in this blog in “Is the “Ponzi Scheme Presumption” Expanding into New Territory?

   That decision was recently upheld on appeal to the district court. The appellate court affirmed that the Ponzi scheme presumption can be applied to find fraudulent intent by attributing the requisite intent to a controlling entity. See Ritchie Capital Management, L.L.C.  v. Stoebner (available here). The district court quoted extensively from the bankruptcy court opinion and relied upon the following facts, among others, in agreeing with the bankruptcy court that the Ponzi scheme presumption applied to avoid the lien that Polaroid granted to Ritchie Capital Management. Here are some statements that the district court made:

  • Tom Petters operated a Ponzi scheme.
  • The past operation of a freestanding business by the ‘legitimate’ related entity and the abstract possibility of continuing such an operation do not bar the application of the presumption.
  • Tom Petters – the architect and purveyor of the Ponzi scheme – controlled Polaroid as its Chairman and sole board member. And Tom Petters effected the transfer despite the objections of Mary Jeffries, Polaroid’s CEO.
  • The Ponzi scheme presumption short-circuits the inquiry into actual fraudulent intent because “transfers made in the course of a Ponzi scheme could have been made for no other purpose other than to hinder, delay or defraud creditors.”
  • The transfer occurred solely because Tom Petters, who had the authority to effect it over the objections of Polaroid’s management, intended it to occur.
  • Polaroid was technically a stand-alone operating company.
  • However, Polaroid was inextricably intertwined with the Ponzi scheme from the outset of Tom Petters’ acquisition of the company. 
  • Petters purchased Polaroid entirely, or nearly entirely, with the fruits of his Ponzi scheme transactions.
  • Polaroid fell under the ownership of PGW – the entity that Petters also controlled as sole shareholder, board chair, and CEO. 
  • As PGW’s subsidiary, Polaroid’s financial stability was dependent on PGW.
  • Tom Petters exerted ultimate control over the debtor-transferor Polaroid, just as he did over PGW and PCI. 
  • Petters was the 100% beneficial owner of Polaroid’s stock and its sole board member.
  • At least one of the reasons for the acquisition of Polaroid was Petters’ desire to appear wealthy to potential investors in his ostensible diverting business.
  • The Bankruptcy Court therefore attributed Tom Petters’ intent to the Polaroid Corporation as transferor, “because Petters controlled that artificial entity.”

   On the issue of common control, the district court concluded:

   Thus, while it is true that Polaroid was not operating a Ponzi scheme, Polaroid was purchased with the proceeds of the scheme, and was controlled, for all practical purposes, by the purveyor of the scheme. Its financial fate was inextricably linked to that scheme.

   On the issue of intent, the district court stated:
[W]hen Petters raided Polaroid by pledging its trademark assets – assets that should have been available for Polaroid’s own financing needs, and ultimately, for its creditors – Petters either intended to render those assets unavailable to Polaroid, or at the very least, “should have seen this result as a natural consequence of [his] actions.”
   On the issue of whether the transfer was “in furtherance” of the Ponzi scheme, the court noted:
[A]s the architect and chief perpetrator of the Ponzi scheme, and the owner of PGW, Petters’ motivations – whether based on fears of personal financial ruin or criminal liability, or concern for PGW specifically, or all three – such motivations are indistinguishable from Petters’ motivation in perpetuating the operation of the Ponzi scheme. Petters’ personal interests were entirely intertwined with the Ponzi scheme and the scheme’s continuation.
   In conclusion, the court stated:
For all of the foregoing reasons, given this particular factual context, the Court finds that the Ponzi scheme presumption applies to the facts presented here to satisfy the requirement of actual fraudulent intent under both federal and state law. There can be no dispute that Tom Petters operated a massive Ponzi scheme. Through his control of Polaroid, he looted Polaroids’ assets in order to appease the Ritchie Entities, whose loan money had gone not to Polaroid, but to pay off other investors. Petters effected the transfer in a desperate attempt to keep his Ponzi scheme afloat in its waning days. Appellants’ appeal regarding the application of the Ponzi scheme presumption is therefore denied.
   It remains to be seen if this decision will stick. The defendants have appealed to the Eighth Circuit.

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